Question

Please answer question #1

Scarch Gardner, Icffrey Steven G Comprehensive_Problem 2 FALL_2020 - Protected View - Saved to this BC- File Home Insert Draw Design Layout References Mailings Review View Help RCM O PROTECTED VIEW Be carefulfiles from the Internet can contain viruses. Unless you need to edit, it's safer to stay in Protected View. Share Comments Enable Editing X BUSI 320 Comprehensive Problem 2 FALL 2020 You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit. 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 $240,000 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 2% of incremental sales (whether they actually end up collected or not), and production and selling costs are projected to be 78% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes. 1) Compute the incremental income after taxes that would result from these projections: 2) Compute the incremental Return on Sales if these new credit customers are accepted: If the receivable turnover ratio is expected to be 3 to 1 and no other asset buildup is needed 1 to serve the new customers... 3) Compute the additional investment in Accounts Receivable 4) Compute the incremental Return on New Investment 5) If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain. Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days. Page 1 of 1 364 words Focus DC EL 100% Type here to search O GA 1644 13/09/2020

Answer 1

Incremental Revenue From Project = $240,000

(-)Production & selling cost 78% of

sales ($240,000*78%) = ($187,200)

(-)Uncollectible ($240,000*6%) = ($ 14,400)

(-)Additional collection cost

($240,000*2%) = ($ 4,800)

Earnings Before Tax = $33,600

(-) Taxes @30% = ($10,080)

Net Income from new Project = $23,520