BUSI 320 Comprehensive Problem 2 Spring 2019 You have been askedto assess the expected financial impact of each of the followingproposals to improve the profitability of credit sales made by yourcompany. Each proposal is independent of the other. Answer allquestions. Showing your work may earn you partial credit. Proposal#1 would extend trade credit to some customers that previously havebeen denied credit because they were considered poor risks. Salesare projected to increase by $120,000 per year if credit isextended to these new customers. Of the new accounts receivablegenerated, 6% are projected to be uncollectible. Additionalcollection costs are projected to be 5% of incremental sales, andproduction and selling costs are projected to be 80% of sales. Yourfirm expects to pay a total of 30% of its income after expenses intaxes. 1) Compute the incremental income after taxes that wouldresult from these projections: 2) Compute the incremental Return onSales if these new credit customers are accepted: If the receivableturnover ratio is expected to be 4 to 1 and no other asset buildupis needed to serve the new customers⦠3) Compute the additionalinvestment in Accounts Receivable 4) Compute the incremental Returnon New Investment 5) If your company requires a 20% Rate of Returnon Investment for all proposals, do the numbers suggest that tradecredit should be extended to these new customers? Explain. Proposal#2 would establish local collection centers throughout the regionto decrease the time it takes to convert credit payments that aremailed in by check to cash. It is estimated that establishing thesecollection centers would reduce the average collection time by 2days. 1) If the company currently averages $25,000 in collectionsper day, how many dollars will this suggested cash managementsystem frees up? 2) If all freed up dollars would be used to paydown debt that has an interest rate of 8%, how much money could besaved each year in interest expense? 3) Do the numbers suggest thatthis new system should be implemented if its total annual cost is$7200? Explain.
BUSI 320 Comprehensive Problem 2 Spring 2019 You have been askedto assess the expected financial impact of each of the followingproposals to improve the profitability of credit sales made by yourcompany. Each proposal is independent of the other. Answer allquestions. Showing your work may earn you partial credit. Proposal#1 would extend trade credit to some customers that previously havebeen denied credit because they were considered poor risks. Salesare projected to increase by $120,000 per year if credit isextended to these new customers. Of the new accounts receivablegenerated, 6% are projected to be uncollectible. Additionalcollection costs are projected to be 5% of incremental sales, andproduction and selling costs are projected to be 80% of sales. Yourfirm expects to pay a total of 30% of its income after expenses intaxes. 1) Compute the incremental income after taxes that wouldresult from these projections: 2) Compute the incremental Return onSales if these new credit customers are accepted: If the receivableturnover ratio is expected to be 4 to 1 and no other asset buildupis needed to serve the new customers⦠3) Compute the additionalinvestment in Accounts Receivable 4) Compute the incremental Returnon New Investment 5) If your company requires a 20% Rate of Returnon Investment for all proposals, do the numbers suggest that tradecredit should be extended to these new customers? Explain. Proposal#2 would establish local collection centers throughout the regionto decrease the time it takes to convert credit payments that aremailed in by check to cash. It is estimated that establishing thesecollection centers would reduce the average collection time by 2days. 1) If the company currently averages $25,000 in collectionsper day, how many dollars will this suggested cash managementsystem frees up? 2) If all freed up dollars would be used to paydown debt that has an interest rate of 8%, how much money could besaved each year in interest expense? 3) Do the numbers suggest thatthis new system should be implemented if its total annual cost is$7200? Explain.
Related questions
Fast Turnstiles Co. is evaluating the extension of credit to anew group of customers. Although these customers will provide$234,000 in additional credit sales, 15 percent are likely to beuncollectible. The company will also incur $16,500 in additionalcollection expense. Production and marketing costs represent 70percent of sales. The firm is in a 30 percent tax bracket and has areceivables turnover of four times. No other asset buildup will berequired to service the new customers. The firm has a 10 percentdesired return.
a-1. Calculate the incremental income aftertaxes.
a-2. Calculate the return on incrementalinvestment. (Input your answer as a percent rounded to 2decimal places.)
a-3. Should Fast Turnstiles Co. extend credit tothese customers?
| Yes | |
| No |
b-1. Calculate the incremental income after taxesif 18 percent of the new sales prove to be uncollectible.
b-2. Calculate the return on incrementalinvestment if 18 percent of the new sales prove to beuncollectible. (Input your answer as a percent rounded to 2decimal places.)
b-3. Should credit be extended if 18 percent ofthe new sales prove uncollectible?
| Yes | |
| No |
c-1. Calculate the return on incrementalinvestment if the receivables turnover drops to 1.6, and 15 percentof the accounts are uncollectible. (Input your answer as apercent rounded to 2 decimal places.)
c-2. Should credit be extended if the receivablesturnover drops to 1.6, and 15 percent of the accounts areuncollectible?
