Question: Problem 7-20 Credit policy decision with changing variables [LO7-4] Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers.

Problem 7-20 Credit policy decision with changing variables [LO7-4] Slow Roll

Problem 7-20 Credit policy decision with changing variables [LO7-4] Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $252,000 in additional credit sales, 8 percent are likely to be uncollectible. The company will also incur $16,600 in additional collection expense. Production and marketing costs represent 75 percent of sales. The firm is in a 35 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 12 percent desired return. Assume the average collection period is 120 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Return on incremental investment % b. Should credit be extended to the new group of customers? O No O Yes

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