Question

Lyman Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are projected at 70% of sales, and its effective tax rate is 40%. If Lyman accepts this opportunity, its after-tax profits would increase by an estimated:_____.
a. $10,200.
b. $10,000.
c. $9,000.
d. $14,400.

Answer 1

Answer:

Option c ($9,000) is the correct answer.

Explanation:

The given values are:

Annual increase in sales,

= $100,000

Now,

The collection expenses will be:

= $100,000\times 15 \ percent$

= $15,000$

Selling as well as manufacturing expenses will be:

= $100,000\times 70 \ percent$

= $70,000$

Tax expense will be:

= $15,000\times 40 \ percent$

= $6,000$

After-tax profits increase will be:

= $15,000-6,000$

= $9,000$ ($)