Makena Office Supplies is considering a more liberal increase sale. Pertinant financial data follows:
Uncollectible Accounts ..........12%
Collection Costs (% of new sales) ....... 8%
Production and Selling Costs (% of new sales) .75%
Accounts Receivable Turnover .......... 4
Inventory Turnover .............. 6
Income Taxes ........... 35%
Sales Increase ........... $ 75,000
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 Makena’s incremental after tax return on investment?
c. Should Makena liberalize credit if a 15 percent after tax return on investment is required?
d. What would be the total incremental investment in accounts receivable and inventory to support an increase in sales?
e. Given the income determined in part b and the investment determined in part d, should Makena extend more liberal credit terms?