21. Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will...
21. Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $342,000 in additional credit sales, 13 percent are likely to be uncollectible. The company will also incur $17,100 in additional collection expense. Production and marketing costs represent 73 percent of sales. The firm is in a 35 percent tax bracket and has a receivables turnover of five times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return.
a-1. Calculate the incremental income after taxes.
|
a-2. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)
|
b-1. Calculate the incremental income after taxes
if 16 percent of the new sales prove to be uncollectible
|
b-2. Calculate the return on incremental investment if 16 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)
|
c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 13 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)
|
Homework Answers
| a.1. | Calculation of Income after taxes | |
| Additional Credit sales | $342,000 | |
| Less:Uncollectible sales($342,000*13%) | 44,460 | |
| Less:Additional collection expenses | 17,100 | |
| Less:Production and marketing cost($342,000*73%) | 249,660 | |
| Incremental Income before taxes | $30,780 | |
| Less:Taxes @35% | $10,773 | |
| Incremental Income after taxes | $20,007 | |
| a.2 | Incremental Accounts receivable =$342,000/ 5times=$68,400 | |
| So Return on Incremental Investment =$20,007 / $68,400 =29.25% | ||
| b.1 | Calculation of Income after taxes | |
| Additional Credit sales | $342,000 | |
| Less:Uncollectible sales($342,000*16%) | 54,720 | |
| Less:Additional collection expenses | 17,100 | |
| Less:Production and marketing cost($342,000*73%) | 249,660 | |
| Incremental Income before taxes | $20,520 | |
| Less:Taxes @35% | $7,182 | |
| Incremental Income after taxes | $13,338 | |
| b.2 | So Return on Incremental Investment =$13,338 / $68,400 =19.50% | |
| c.1 | Additional Credit sales | $342,000 |
| Less:Uncollectible sales($342,000*13%) | 44,460 | |
| Less:Additional collection expenses | 17,100 | |
| Less:Production and marketing cost($342,000*73%) | 249,660 | |
| Incremental Income before taxes | $30,780 | |
| Less:Taxes @35% | $10,773 | |
| Incremental Income after taxes | $20,007 | |
| Incremental Accounts receivable =$342,000/ 1.60 times=$213,750 | ||
| So Return on Incremental Investment =$20,007 / $213,750 =9.36% | ||
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