Problem:
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $240,000 if credit is extended to these new customers. Of the new accounts receivable generated, 6% will prove to be uncollectible. Additional collection costs will be 72% of sales, and production and selling costs will be 25% of sales. The firm is in the 25% tax bracket.
Required:
Question 1: Compute the incremental income after taxes
Question 2: What will Johnson's incremental return on sales be if these new credit customers are accepted?
Question 3: If the receivable turnover ration is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be?
Note: Please explain comprehensively and give step by step solution.