Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79% of sales. a. Compute the incremental income before taxes. b. What will be the firm's incremental return on sales be if these new credit customers are accepted? (Round answer to 1 decimal place.) c. If the receivable turnover ratio is 6 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 answer to the nearest whole percentage.)
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79% of sales. a. Compute the incremental income before taxes. b. What will be the firm's incremental return on sales be if these new credit customers are accepted? (Round answer to 1 decimal place.) c. If the receivable turnover ratio is 6 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 answer to the nearest whole percentage.)
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
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