Question

Having an issue with question #2. Thank you. Unable to come up with the correct answer.

Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks.   Sales are projected to increase by $120,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 5% of incremental sales, and production and selling costs are projected to be 80% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes.

2. Compute the incremental Return on Sales if these new credit customers are accepted:

If the receivable turnover ratio is expected to be 4 to 1 and no other asset buildup is needed to serve the new customers…

Answer 1

Answer .

Net incremental return from incremental sale is $7560

%of incremental return on incremental sale is 6%

Above answers are calculated as following

COMPUTATION OF INCREMENTAL RETURN ON SALES
Incremental Sales	$120,000
Less:
Production and Selling costs @80% of Sales = $120000*80%	$96,000
Additional uncollectible on incremental sales= 6%of $120000	$7,200
Additional Collection cost on incremental sales = 5% of $120000	$6,000
Incremental Income from incremental sale	$10,800
Less; Income Tax @ 30% of $10800 =	$3,240
Net incremental income/return	$7,560
% of incremental return on sale = $7560*100/$120000 =	6%

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