Reference no: EM132333432

Question

The new credit manager of Kay's department store plans to liberalize the firm's credit policy. The firm currently generates credit sales of $575,000 annually. The more lenient credit policy is expected to produce credit sales of $750,000. The bad debt losses on additional sales are projected to be 5% despite an additional $15,000 collection expenditure. The new manager anticipates production and selling costs other than additional bad debt and collection expense will remain at the 85% level. The firm is in the 34% tax bracket.

A. If the firm maintains its receivables turnover of 10 times, how much will the receivables balance increase?

B. What would be Kay's incremental after-tax return on investment?

C. Assuming additional inventory of $35,000 is required to support the additional sales compute the after-tax return on investment?

Inland Service is considering changing its credit terms from net 15 to net 30. If this change is made, the average collection period will increase from 20 days to 40 days and 50 Million of new sales will be added to its current sales level of 30 Million. The bad debts for their new customer are expected to be 20% of sales. Inland's variable costs are 75% of sales and its tax rate is 46%. Should Inland extend the credit period to 30 days?