2% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment a) Should it extend credit to these customers? b) Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same? Kindly help me to solve this, thanks!

2% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment a) Should it extend credit to these customers? b) Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same? Kindly help me to solve this, thanks!

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 10P

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Toy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment. Should it extend credit to these customers? Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?
Animal Kingdom is evaluating the extension of credit to a new grouo of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset build up will be required to service the new customers. The firm has a 10% desired return on investment. Should it extend credit to these customers and should credit be extended if the receivables tumover drops to 1.5 and all other factors are the same? Can you please show me an explanation and a solution for this? Thank you so much!
Toy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers willprovide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% taxbracket and has a receivables turnover of six times. No other asset buildup will be required to service the newcustomers. The firm has a 10% desired return on investment.a. Should it extend credit to these customers?b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?
Sunny Manufacturing is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. a. Compute the incremental income before taxes. $ Incremental income before taxes b. What will the firm's incremental return on sales be if these new credit customers are accepted? (Round the final answer to 2 decimal place.) Incremental return on sales % c. If the receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Sunny Manufacturing's incremental return on new average investment be? (Do round intermediate calculations. Round the final answer to the nearest whole percentage.) Incremental return on new average investment %
Slow Roll Drum Co. is evaluating the extension of 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 also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 120 days. a. Compute the return on incremental investment b. Should credit be extended? 1 i B IF T 111
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Return on incremental investment % b. Should credit be extended to the new group of customers? No Yes
The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 15 days - paying in 45 days and thus becoming 15 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? O 37.35% O 32.22% O 102.12% O 10.21% O 14.35%
Jamboo Corporation is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230009 if credit is extended. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 75 percent of sales. The firm needs to pay 1,500 tax on additional sales. Compute Net income after tax. ANSWER FORMAT: 1234.56 Answer:
Blossom Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $40. Expected sales will increase by 1,000 units per year. The original sales are 11.000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $2.000 per year. The firm will finance the additional investment in receivables by using a line of credit, which charges 5-percent interest. The firm's tax rate is 20 percent. Calculate the NPV. (Assume Blossom benefits from the credit policy change indefinitely.) (Round answer to 2 decimal places, e.g. 15.75. Enter negative amounts using either a negative sign preceding the number eg.-45 or parentheses eg.(45)) NPV $ 513836 Should the firm begin extending credit under the terms described? Yes
Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected. The firm’s equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.) Calculate the additional profit contribution from sales that the firm will realize if it makes the proposed change. What marginal investment in accounts receivable will result? Calculate the cost of the marginal investment in accounts receivable. Should the firm implement the proposed change? What other information would be helpful in your analysis?
Price Corporation is considering selling to a group of new customers and creating new annual sales of $240,000. 3% will be uncollectible. The collection cost on all accounts is 6% of new sales, the cost of producing and selling is 83% of sales, and the firm is in the 22% tax bracket. What is the profit on new sales?
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $270,000 if credit is extended to these new customers. Of the new accounts receivable generated, 9 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. 1. Compute the incremental income before taxes. 2. What will the firm’s incremental return on sales be if these new credit customers are accepted? (Round final answer to 2 decimals) 3. If the receivable turnover ratio is 5 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson Electronics’ incremental return on new average investment be? (Round only the final answer to %)