Question: Collins Office Supplies is considering a more liberal credit policy to raise sales, but expects that 9% of the new accounts will be uncollectible. Collection costs are 5% of new sales, production & selling costs are 78%, & accounts receivable turnover is 5 times. Suppose income taxes of 30% & an increase in sales of $80,000. No other asset buildup will be needed to service the new accounts.
[A] Should Collins liberalize credit if a 15% after tax return on investment is required?
[B] Suppose Collins also requires raising its level of inventory to support new sales and that inventory turnover is 4 times.