Question: (a) Solve problem 17 on page 223. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by

(a) Solve problem 17 on page 223.

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit were extended to these new customers. Of the new accounts receivable gener-ated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.

a. Compute the incremental income after taxes.

b. What will Johnsons incremental return on sales be if these new credit cus-tomers are accepted?

c. If the receivables turnover ratio is 3 to 1 and no other asset buildup is needed to serve the new customers, what will Johnsons incremental return on new average investment be?

(b) Answer Discussion Question 6 on page 219.

Explain why the bad debt percentage or any other similar credit-control per-centage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration? (LO7-4)

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