Ventrix Co. is a highly successful supplier of leather to manufacturers of leath

ID: 2755551 • Letter: V

Question

Ventrix Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $900,000, a high 22% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 72% of sales. Tanner's tax rate is 31%. Ventrix has a receivables turnover of 2.8.

Calculate Ventrix's incremental net income on the new sales.

Calculate the incremental accounts receivable

Calculate the ROI on the additional investment.

Explanation / Answer

Ventrix's incremental net income on the new sales:-

Sales

(-) variable costs [ 72 % of 900000 ]

(-) Bad debts ( 22 % of 900000)

900000

648000

198000

Earning before Tax

(-) Tax @ 31 %

54000

16740

Incremental account receivable:- Net credit sales / receivables Turnover

= 900000 / 2.8

= $ 321429 (approx) [Before Bad-debt]

Conclusion:-

Incremental account receivable:-