Question

Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 10 percent of the new accounts will be uncollectible. Collection costs are 4 percent of new sales, production costs are 76 percent of sales and accounts receivable turnover is four times. Assume an increase in sales of $78,000. No other asset buildup will be required to service the new accounts. a. What is the level of investment in accounts receivable to support this sales expansion? Investment in accounts receivable b. What would be Henderson's incremental before-tax return on investment? Return on incremental investment c. Should Henderson liberalize credit if a 30 percent before-tax return is required (opportunity cost of capital)? Yes No Assume Henderson also needs to increase its level of Inventory to support new sales and that inventory turnover is five times on Cost of Goods Sold d. What would be the total incremental investment in accounts receivable and inventory to support a $78.000 Increase in sales Total incremental investment e. Given the income determined in part band the investment determined in part d should Henderson extend more liberal credit terms?

Answer 1

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ACCOUNTS latest Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins E AutoSum - Cut A A Wrap Text Calibri 11 General Copy Fill Merge & Center Paste B I U $ % , 000 Conditional Format Cell Insert Delete Format Sort & Find & Format Painter Clear Filter Select Formatting as Table Styles Alignment Clipboard Font Number Styles Cells Editing fox DD484 СТ CU cV CW CX CY CZ DA DB DC DD DE DF DG 484 ACCOUNTS RECEIVABLE SALES/ACCOUNTS RECEIVABLE TURNOVER 19500 [78000/4] (a) 485 INVESTMENT IN ACCOUNTS RECEIVABLE = 486 487 (b) SALES 78000 7800 [78000 X 10% 3120 [78000 X 4% 59280 [78000 X 76% 488 BAD DEBT= 489 COLLECTION COSTS= 490 PRODUCTION COSTS = 491 INCREMENTAL PROFIT 7800 492 493 494 40.00% [7800/19500] 495 RETURN ON INCREMENTAL INVESTMENT = 496 (c) YES, SHOULD LIBERALISE CREDIT AS RETURN IS HIGHER THAN REQUIRED RATE OF 30% 497 498 499 INVENTORY COGS/INVENTORY TURNOVER 11856 [59280/5] 31356 [19500 11856] 500 INVESTMENT IN INVENTORY = 501 (d) TOTAL INCREMENTAL INVESTMENT = 502 24.88% [7800/31356] 503 RETURN ON INCREMENTAL INVESTMENT = (e) budget NO, SHOULD NOT LIBERALISE CREDIT AS RETURN IS LOWER THAN REQUIRED RATE OF 30% 45 days cycle ROE, BV MV ratio 504 VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET DIFF ANALYSIS ove dupont FIFO CASH BUDGET 120 % erences: S69 W 05:06 TENG 27-11-2019