Question

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230,000 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 71 percent of sales. The firm is in the 20 percent tax bracket.
a. Compute the incremental income after taxes.

b. What will Johnson’s incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.)

c. If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer:

a) $       40,480  

b) 17.60%  

Explanation:

Working:  

 

a. Increase in sales a 2,30,000  

Less:    

• Bad debts expenses

b=a*5% 11,500  

• Collection costs

c=a*2% 4,600  

• Production ans selling costs

d=a*71% 1,63,300  

• Earning before tax

e=a-b-c-d 50,600  

• Less: Tax @ 20%

f=e*20%

10,120  

Net Income 40,480  

b)Return on sales  

Net Income/Sales  

40480/230000  

17.60%