Compute incremental income after taxes

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Reference no: EM131973266

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $190,000 if credit is extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 78 percent of sales. The firm is in the 30 percent tax bracket

a. Compute the 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.)

c. If the accounts receivable turnover ratio is 5 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.)

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 6 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 78 percent, and the accounts receivable turnover is four times. Assume income taxes of 25 percent and an increase in sales of $80,000. No other asset buildup will 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.)

c. Should Henderson liberalize credit if a 16 percent aftertax return on investment is required? Yes No Assume that Henderson also needs to increase its level of inventory to support new sales and that the inventory turnover is four times.

d. What would be the total incremental investment in accounts receivable and inventory needed to support a $80,000 increase in sales? e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms? Yes No

Reference no: EM131973266

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