are 5 percent of new sales production and selling costs are 80 percent, and the

ID: 2819262 • Letter: A

Question

are 5 percent of new sales production and selling costs are 80 percent, and the accounts recetvable tunover is tive tmes Assume income taxes of 20 percent and an increase in salles of $74,000 No other asset buldup wl be required to service the new accounts a. What additional investment in accounts receivable is needed to support this sales expansion? b. What would be Henderson's incremental aftertax return on investment? (input your answer as a percent rounded to 2 decimal places.) 36 ool% O Type here to search

Explanation / Answer

Answer to Part a.

Incremental Accounts Receivable = Increase in Sales / Collection Costs
Incremental Accounts Receivable = 74,000 / 5
Incremental Accounts Receivable = $14,800

Answer to Part b.

Added Sales

$74,000

Account Uncollectible (6% of $74,000)

($4,440)

Annual Incremental Revenue

$69,560

Collection Costs (5% of $74,000)

($3,700)

Production and Selling Costs (80% of $74,000)

($59,200)

Annual Income before Taxes

$6,660

Taxes @ 20%

($1,332)

Incremental Income after Taxes

$5,328

Return on Incremental Investment = 5,328 / 14,800 * 100
Return on Incremental Investment = 36.00%

Answer to Part c.

Yes, Henderson should liberalize Credit policy, as Return on Incremental Investment i.e. 36.00% is more than the required return on Investment.

Answer to Part d.

Investment in Inventory = 74,000 / 5
Investment in Inventory = $14,800

Total Incremental Investment = Investment in Inventory + Investment in Accounts Receivable
Total Incremental Investment = $14,800 + $14,800
Total Incremental Investment = $29,600

Answer to Part e.

Return on Incremental Investment = 5,328 / 29,600 * 100
Return on Incremental Investment = 18%

Yes, as Return on Incremental Investment i.e. 18% is more than the desired return on Investment.