Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $684,000....
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Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $684,000. The company has a 60% cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 5x 8x 2x All $684,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 80 percent of sales. The cost to carry inventory will be 10 percent of inventory. Amortization expense on plant and equipment will be 4 percent of plant and equipment. The tax rate is 30 percent. Inventory is calculated using cost of goods sold and not sales. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made? Accounts receivable Inventory $ $ Plant and equipment $ Total Investment $ b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together. Collection cost $ Production and selling costs $ Total costs related to accounts receivable $ c. Compute the costs of carrying inventory. Cost of carrying inventory $ d. Compute the amortization expense on new plant and equipment. Amortization expense e. Add together all the costs in parts b, c, and d. Total cost $ f. Compute income after taxes. Income after taxes $ g. If the firm has required return on investment of 10 percent, should it undertake the promotional campaign described throughout this problem? g. If the firm has required return on investment of 10 percent, should it undertake the promotional campaign described throughout this problem? Yes No Problem 7-27 In the previous problem, if inventory had only been 2 times: a. What would be the new value for inventory investment? Inventory investment $ b.1 What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing income after taxes. (Round the final answer to 1 decimal place.) Rate of return % b.2 Should the campaign be undertaken? Yes O No Compute the cost of not taking the following trade discounts: (Use 365 days in a year. Round the final answers to 2 decimal places.) a. 2/17, net 55. Cost of lost discount % b. 2/15, net 55. Cost of lost discount % c. 3/14, net 30. Cost of lost discount % d. 4/13, net 190. Cost of lost discount % Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $684,000. The company has a 60% cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 5x 8x 2x All $684,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 80 percent of sales. The cost to carry inventory will be 10 percent of inventory. Amortization expense on plant and equipment will be 4 percent of plant and equipment. The tax rate is 30 percent. Inventory is calculated using cost of goods sold and not sales. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made? Accounts receivable Inventory $ $ Plant and equipment $ Total Investment $ b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together. Collection cost $ Production and selling costs $ Total costs related to accounts receivable $ c. Compute the costs of carrying inventory. Cost of carrying inventory $ d. Compute the amortization expense on new plant and equipment. Amortization expense e. Add together all the costs in parts b, c, and d. Total cost $ f. Compute income after taxes. Income after taxes $ g. If the firm has required return on investment of 10 percent, should it undertake the promotional campaign described throughout this problem? g. If the firm has required return on investment of 10 percent, should it undertake the promotional campaign described throughout this problem? Yes No Problem 7-27 In the previous problem, if inventory had only been 2 times: a. What would be the new value for inventory investment? Inventory investment $ b.1 What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing income after taxes. (Round the final answer to 1 decimal place.) Rate of return % b.2 Should the campaign be undertaken? Yes O No Compute the cost of not taking the following trade discounts: (Use 365 days in a year. Round the final answers to 2 decimal places.) a. 2/17, net 55. Cost of lost discount % b. 2/15, net 55. Cost of lost discount % c. 3/14, net 30. Cost of lost discount % d. 4/13, net 190. Cost of lost discount %
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Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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