Johnson Electronics is considering extending trade credit to some customers prev
ID: 2647233 • Letter: J
Question
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $130,000 if credit is extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 4 percent of sales, and production and selling costs will be 72 percent of sales. The firm is in the 25 percent tax bracket.
a. Compute the incremental income after taxes.
Incremental income after taxes $
b. What will Johnson
Explanation / Answer
1.Incremental Income After Tax
Particulars
Amount ( $)
Incremental Sales
130,000
Less: Incremental production and selling cost
93600 ( 130000x72%)
Less: Additional collection cost
5200 ( 130000x4%)
Less: Incremental Bad debts
9100(130000x7%)
Incremental Income before Tax
22100
Less: Incremental Tax
5525( 22100x25%)
Incremental Income After Tax
16575
2.Incremental Return on sales Ratio
Incremental return on sales= Incremental Income Before Tax ( EBIT)/ Incremental Revenue
= (22100/130000)X100
Incremental return on sales %= 17%
3.Incremental Return on new average investment
Accounts Receivable Turnover ratio= Net Credit Sales/Average Accounts Receivable
5= 130000/ Average Accounts Receivable
Average accounts receivable (investment)= 26000
Incremental return on new average investment= (Incremental EBIT/ New Average Investment)
= (22100/26000)X100
Incremental return on new average investment= 85%
Particulars
Amount ( $)
Incremental Sales
130,000
Less: Incremental production and selling cost
93600 ( 130000x72%)
Less: Additional collection cost
5200 ( 130000x4%)
Less: Incremental Bad debts
9100(130000x7%)
Incremental Income before Tax
22100
Less: Incremental Tax
5525( 22100x25%)
Incremental Income After Tax
16575
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