Homework Help Question & Answers

Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 5 percent o...

Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 5 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production costs are 80 percent of sales, and accounts receivable turnover is five times. Assume an increase in sales of $79,000. 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 35 percent before‐tax return is required (opportunity cost of capital)? Yes or No

Assume Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is four times on Cost of Goods Sold. d. What would be the total incremental investment in accounts receivable and inventory to support a $79,000 increase in sales? Total incremental investment $

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms? Yes or No

0 0
Next > < Previous
ReportAnswer #1
a Investment in accounts receivable =Increase in sale / account receivable turnover
Investment in accounts receivable =$79,000 / 5times =$15,800
b Increase in sales $79,000
Uncollectible receivable($79,000*5%) (3,950)
Annual Incremental Revenue 75,050
Collection cost($79,000*5%) (3,950)
Production & Selling cost($79,000*80%) (63,200)
Incremental Revenue before tax $7,900
Return on Incremental Revenue($7,900 / 15,800)*100 =50.00%
c Yes 50% exceeds the required return of 35%
d Investment in inventory =$79,000 / 4=$19,750
Total incremental investment.
Inventory $19,750
Accounts Receivable $15,800
Incremental Investment $35,550
e No since the investment required in option D is more than which required in option b
Know the answer?
Add Answer of:
Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 5 percent o...
Your Answer: Your Name: What's your source?
Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects...

    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...

  • Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible

    Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is five times. Assume income taxes of 30 percent and an increase in sales of $80,000. No other asset buildup will be required to service the new accounts. a. What is the level of accounts receivable...

  • The new credit manager of Kay's Department store plans to liberalize the firm's credit policy

    The new credit manager of Kay's Department store plans to liberalize the firm's credit policy. The firm currently generates credit sales of $575,000 annually. The more lenient credit policy is expected to produce credit sales of $750,000. The bad debt losses on additional sales are projected to be 5% despite an additional$15,000 collection expenditure. The new manager anticipates production and selling costs other than additional bad debt and collection expenses will remain at the 85% level. The firm is in...

  • Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

    Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $146,000 if credit is extended to these new customers. Of the new accounts receivable generated, 8 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 72 percent of sales. The firm is in the 10 percent tax bracket. a. Compute the incremental income after taxes. Incremental income after taxes...

  • Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

    Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket. a. Compute the incremental income after taxes. Incremental income after taxes...

  • Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

    Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $250,000 if credit is extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs ill be 70 percent of sales. The firm is in the 30 percent tax bracket a. Compute the incremental income after taxes. Incremental income after taxes...

  • Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would...

    Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit were extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket. a. Compute the incremental income after taxes. Incremental income after taxes...

  • Global Services is considering a promotional campaign that will increase annual credit sales by $440,000. The...

    Global Services is considering a promotional campaign that will increase annual credit sales by $440,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:      Accounts receivable 4 times Inventory 4 times Plant and equipment 2 times       All $440,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 73 percent of sales. The cost to...

  • Global Services is considering a promotional campaign that will increase annual credit sales by $420,000. The...

    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...

  • Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers...

    Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will incur $16,200 in additional collection expenses. Production and marketing expenses represent 72 percent of sales. The company has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 20 percent desired return on investment. a-1....

Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
Share Your Knowledge

Post an Article
Post an Answer
Post a Question with Answer

Self-promotion: Authors have the chance of a link back to their own personal blogs or social media profile pages.