Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

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Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would inc

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Answer 1

Answer #1

a).

Particulars	Amount
Additional Sales	$150,000
Less: Accounts Uncollectible (5% of new sales)	($7,500)
Annual Incremental Revenue	$142,500
Less: Collection Cost(2% of new sales)	($3,000)
Less: Production & Selling Costs (74% of new sales)	($111,000)
Annual Income before taxes	$28,500
Less:Taxes(35%)	($9,975)
Incremental Income after Taxes	$18,525

b). Incremental return on sales = Incremental Income / Incremental Sales

= $18,525 / $150,000 = 12.35%

c). Accounts Receivable Turnover = Incremental Sales / Average Receivables

3 = $150,000 / Average Receivables

Average Receivables = $150,000 / 3 = $50,000

Incremental return on new average investment = Incremental Income / Average Receivables

= $18,525 / $50,000 = 37.05%

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Answer 2

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