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Question - Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $280,000 if credit were extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 76 percent of sales. The firm is in the 15 percent tax bracket.
Required -
a. Compute the incremental income after taxes.
b. What will Johnson's incremental return on sales be if these new credit customers are accepted?
c. If the accounts receivable turnover ratio is 7 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?
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