extending trade credit to some customers previously considered poor risks. Sales
ID: 2656083 • Letter: E
Question
extending trade credit to some customers previously considered poor risks. Sales would increase by $110,000 if credit is extended to these new receivable generated, 5 percent will prove customers. Of the new accounts to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 70 percent of sales. The firm is in the 10 percent tax bracket a. Compute the incremental income after taxes. Incremental income after taxes b. What will Johnson's incremental returm on sales be if these new credi t customers are accepted? (Input your answer as a percent rounded to 2 decimal places.) Incremental return on sales% c. If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Incremental return on new average investment Check my work Previous attempt O Type here to search 1:08 AM 7/27/2018Explanation / Answer
Answer
a) Incremental Income Calculation
b) Incremental Return on Sales
Return = Incremental Income/Incremental sales
Return = ($22770/$110000)*100
Return = 20.7%
c) Incremental Return on new Investment
Accounts Receivable ratio = 3:1
Receivables = Sales/Receivables Turnover
Receivables = ($110000/3)
Receivables = $36667
Incremental Return on New average Investment = ($22770/$36667)*100 = 62.10%
Particulars Amount Incremental sales $110000 - Uncollectible receivable (5%) ($5500) - Cost of collection (2%) ($2200) - Production and selling cost (70%) ($77000) Gross Income $25300 - Taxes (10%) ($2530) Incremental Income $22770Related Questions
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