Business, 12.10.2020 14:01 seanholmes91405
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $115,000 if credit were 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. The firm is in the 30 percent tax bracket.
Required:
a. Compute the incremental income after taxes.
b. What will Johnson’s incremental return on sales be if these new credit customers are accepted?
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?
Answers: 2
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