Reference no: EM132503866

Question 1 - Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will incur $16,200 in additional collection expenses. Production and marketing expenses represent 72 percent of sales. The company has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 20 percent desired return on investment.

Required -

a-1. Calculate the incremental income before taxes from this new group of customers.

a-2. Calculate the return on incremental investment.

a-3. Should Cominsky extend credit to these customers?

b-1. Calculate the incremental income before taxes from the new group of customers if 15 percent of the sales prove uncollectable.

b-2. Calculate the return on incremental investment if 15 percent of the new sales prove uncollectible.

b-3. Should credit be extended if 15 percent of the new sales prove uncollectible?

c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6 and 12 percent of the accounts are uncollectible (as in part a)?

c-2. Should credit be extended if the receivables turnover drops to 1.6 and 12 percent of the accounts are uncollectible (as in part a)?

Question 2 - Reconsider Comiskey Fence. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectible).

Required -

a. Compute the return on incremental investment.

b. Should credit be extended?