Johnson Electronics is considering extending trade credit to some customers prev
ID: 2752059 • Letter: J
Question
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.
Compute the incremental income after taxes.
What will Johnson’s incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.)
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.)
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.
a.Compute the incremental income after taxes.
Incremental income after taxes $ b.What will Johnson’s incremental return on sales be if these new credit 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 %Explanation / Answer
a)Incremental Income after taxes = Sales - Selling Cost - Additional COllection Cost - Provision for Doubtful Debts]*(1-T)
= [150,000 - 74% of 150,000 - 2% of 150,000 - 5% of 150,000]*0.65
= 28,500*0.65
= $18,525
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..
b)Johnson’s incremental return on sales be if these new credit customers are accepted = Incremental Income after taxes/Incremental Sales * 100
= 18,525/150,000 * 100
= 12.35%
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c) Accounts receivable turnover ratio = 3
Average Collection Time = 360/3 = 120 days
Avg Investment = 150,000*(120/360)
= $50,000
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..
Johnson’s incremental return on new average investment be = Incremental Income after taxes/ new average investment * 100
= 18,525/50,000 * 100
= 37.05%
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