Kevin Office Supplies is provided the following data considering a more liberal credit policy to increase sales,

Question:

Kevin Office Supplies is provided the following data considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is 12 times. Assume income taxes of 39 percent and an increase in sales of $180,000 No other asset buildup will be required to service the new accounts.

a. What is the level of accounts receivable to support this sales expansion?

b. What would be Kevin's incremental aftertax return on investment?

c. Should Kevin liberalize credit if a 18 percent aftertax return on investment is required?

d. What would be the total incremental investment in accounts receivable and inventory to support a $180,000 increase in sales?

e. Given the income determined in part b and the investment determined in part d, should Kevin extend more liberal credit terms?

Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...