Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett's pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett's pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of $40,000 is required due to the anticipated sales increase from customers in Credit Risk Group 5.

Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett's pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett's pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of $40,000 is required due to the anticipated sales increase from customers in Credit Risk Group 5. Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett's pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett's pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of $40,000 is required due to the anticipated sales increase from customers in Credit Risk Group 5. Table 18.1 Credit Evaluation Data Compiled by Bassett Furniture Industries Table 18.2 Bassett Furniture Industries' Analysis of the Decision to Relax Credit Standards by Extending Full Credit to Customers in Credit Risk Group 4 Step A: Additional sales $300,000 Marginal profitability of additional sales = Profit contribution ratio Additional sales =0.25$300,000 $75,000 Step B: Additional investment in receivables = Additional average daily sales. x Average collection period =365Additionalannualsales60=365$300,00060 $49,315 Cost of the additional investment in receivables = Additional investment in receivables Required pretax rate of return =$49.3150.20 $9.863 Step C: Additional bad-debt loss =Bad-debtlossratioAdditionalsales=0.07$300.000 Step D: Additional imvesument in inventory $120,000 Cost of the additional investment in irventory = Additional investment in inventory Required pretax rate of return =$120.0000.20 $24,000 Step E1 Net change in pretax profits =Marginalreturns-Marginalcosts=A(B+C+D)=$75.000($9.863+$21,000+$24.000) +520.137 Table 18.2 Bassett Furniture Industries' Analysis of the Decision to Relax Credit Standards by Extending Full Credit to Customers in Credit Risk Group 4 Step A: Additional sales $300,000 Marginal profitability of additional sales = Profit contribution ratio Additional sales =0.25$300,000 $75,000 Step B: Additional investment in receivables = Additional average daily sales. x Average collection period =365Additionalannualsales60=365$300,00060 $49,315 Cost of the additional investment in receivables = Additional investment in receivables Required pretax rate of return =$49.3150.20 $9.863 Step C: Additional bad-debt loss =Bad-debtlossratioAdditionalsales=0.07$300.000 Step D: Additional imvesument in inventory $120,000 Cost of the additional investment in irventory = Additional investment in inventory Required pretax rate of return =$120.0000.20 $24,000 Step E1 Net change in pretax profits =Marginalreturns-Marginalcosts=A(B+C+D)=$75.000($9.863+$21,000+$24.000) +520.137 Table 18.1 Credit Evaluation Data Compiled by Bassett Furniture Industries Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett's pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett's pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of $40,000 is required due to the anticipated sales increase from customers in Credit Risk Group 5. Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett's pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett's pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of $40,000 is required due to the anticipated sales increase from customers in Credit Risk Group 5. Table 18.1 Credit Evaluation Data Compiled by Bassett Furniture Industries Table 18.2 Bassett Furniture Industries' Analysis of the Decision to Relax Credit Standards by Extending Full Credit to Customers in Credit Risk Group 4 Step A: Additional sales $300,000 Marginal profitability of additional sales = Profit contribution ratio Additional sales =0.25$300,000 $75,000 Step B: Additional investment in receivables = Additional average daily sales. x Average collection period =365Additionalannualsales60=365$300,00060 $49,315 Cost of the additional investment in receivables = Additional investment in receivables Required pretax rate of return =$49.3150.20 $9.863 Step C: Additional bad-debt loss =Bad-debtlossratioAdditionalsales=0.07$300.000 Step D: Additional imvesument in inventory $120,000 Cost of the additional investment in irventory = Additional investment in inventory Required pretax rate of return =$120.0000.20 $24,000 Step E1 Net change in pretax profits =Marginalreturns-Marginalcosts=A(B+C+D)=$75.000($9.863+$21,000+$24.000) +520.137 Table 18.2 Bassett Furniture Industries' Analysis of the Decision to Relax Credit Standards by Extending Full Credit to Customers in Credit Risk Group 4 Step A: Additional sales $300,000 Marginal profitability of additional sales = Profit contribution ratio Additional sales =0.25$300,000 $75,000 Step B: Additional investment in receivables = Additional average daily sales. x Average collection period =365Additionalannualsales60=365$300,00060 $49,315 Cost of the additional investment in receivables = Additional investment in receivables Required pretax rate of return =$49.3150.20 $9.863 Step C: Additional bad-debt loss =Bad-debtlossratioAdditionalsales=0.07$300.000 Step D: Additional imvesument in inventory $120,000 Cost of the additional investment in irventory = Additional investment in inventory Required pretax rate of return =$120.0000.20 $24,000 Step E1 Net change in pretax profits =Marginalreturns-Marginalcosts=A(B+C+D)=$75.000($9.863+$21,000+$24.000) +520.137 Table 18.1 Credit Evaluation Data Compiled by Bassett Furniture Industries