Compute the incremental income taxes that would result from these projections
Incremental sales: $150,000
Production and selling costs = 80% of the sales
Uncollectable
Additional collection charges
Incremental income before taxes
Tax at 40%
Incremental profits after tax
Compute the incremental Return on Sales if these new credit customers are accepted:
Incremental return on sales
If the receivable turnover ratio is expected to be 3 to 1 and no other asset buildup is needed to serve the new customers…
Compute the additional investment in Accounts Receivable
Expected turnover ratio = 3 to 1. The additional investment will be calculated on production and selling costs.
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Production and selling costs = $120,000
Additional investment in receivables
Compute the incremental Return on New Investment
Incremental return on new investment
If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.
Yes. Because the incremental return, 22.5%, is higher than the required rate of 18%, the trade credit can be extended to these new customers.
Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days.
If the company currently averages $60,000 in collections per day, how many dollars will this suggested cash management system free up?
If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?
Do the numbers suggest that this new system should be implemented if its total annual cost is $5200? Explain.
Yes. This is because the cost of implementation ($5200) is lower than the benefit ($7,200).
