Question

Global Services is considering a promotional campaign that will increase annual credit sales by $420,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 4 times 6 times 2 times All $420,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 5 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 25 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. Accounts receivable Inventory Plant and equipment Total Investment $ 0 b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together. Collection cost Production and selling costs Total collection, production, and selling costs c. Compute the costs of carrying inventory. Cost of carrying inventory

Answer 1

Value Given
AR Turnover Ratio	4
Inventory Turnover Ratio	6
Plant & Equioment Turnover Ratio	2
Additional Credit Sales	420,000.00
a)
AR Turnover Ratio = Credit Sales / Average Accounts Receivable
4 = 420000/Accounts Receivable
Accounts Receivable = 420000/4
= 105000
Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory
Cost of Goods Sold = Sales * 71%
= 420000 * 71%
= 298200
Inventory Turnover Ratio = 298200/Average Inventory
Average Inventory = 298200/6
= 49700
Plant & Equioment Turnover Ratio = Net Sales/Average Fixed Assets
2= 420000/ Average Plant & Equipment
Plant & Euipment = 420000/2
=210000
Particulars	Amount
Accounts Receivable	105,000.00
Inventory	49,700.00
Plant and euipment	210,000.00
Total Investment	364,700.00
b)
Collection Cost = Sales * 3%
= 420000 * 3%
=12600
Production and selling costs = Sales *71%
= 420000 * 71%
=298200
Particulars	Amount
Collection Cost	12,600.00
Production and selling Costs	298,200.00
Total collection,production and selling costs	310,800.00
c)
Carrying cost of inventory = Inventory * 5%
= 105000 * 5%
=5250
Particulars	Amount
Carrying Cost of Inventory	5,250.00
d)
Depreciation = 15% of Plant and euipment
=210000 * 15%
= 31500
Particulars	Amount
Depreciation expenses	31,500.00
e) Computation of Total costs
Particulars	Amount
Collection Cost	12,600.00
Production and selling Costs	298,200.00
Carrying Cost of Inventory	5,250.00
Depreciation expenses	31,500.00
Total costs	347,550.00
f) Computation of income after taxes
Particulars	Amount
Sales	420,000.00
Less: Total Costs	347,500.00
Net Profit	72,500.00
Less: Tax @ 25%	18,125.00
Income after taxes	54,375.00
g-1) Computation of after tax rate of return
After tax rate of return = ( Income after tax / Investment amount ) *100
= (54,375/364700) *100
= 14.91%
g-2) YES, as actual rate of return is higher than 10%