Tanner Co. is a highly successful supplier of leather to manufacturers of leathe

Question

Tanner 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 $600,000, a high 21% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 60% of sales. Tanner's tax rate is 25%. Tanner has a receivables turnover of 2. Calculate Tanner's incremental net income on the new sales. $Blank 1 Calculate the incremental accounts receivable $Blank 2 Calculate the ROI on the additional investment. % Tanner 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 $600,000, a high 21% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 60% of sales. Tanner's tax rate is 25%. Tanner has a receivables turnover of 2. Calculate Tanner's incremental net income on the new sales. $Blank 1 Calculate the incremental accounts receivable $Blank 2 Calculate the ROI on the additional investment. %

Explanation / Answer

a) Incremental net income: Incremental sales 600000 Incremental COGS = 600000*60% = 360000 Bad debts = 600000*21% = 126000 Income before tax 114000 Tax at 25% 28500 Net income 85500 b) Incremental accounts receivable =600000/2 = 300000 c) ROI on additional investment = 85500/300000 = 28.50%

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