Question: Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $216,000 in additional credit sales, 14 percent are likely to be uncollectible. The company will also incur $16,400 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 20 percent tax bracket and has a receivables turnover of five times. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return.
a-1. Calculate the incremental income after taxes.
a-2. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)
a-3. Should Fast Turnstiles Co. extend credit to these customers? Yes No
b-1. Calculate the incremental income after taxes if 17 percent of the new sales prove to be uncollectible.
b-2. Calculate the return on incremental investment if 17 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)
b-3. Should credit be extended if 17 percent of the new sales prove uncollectible? Yes No
c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 14 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)
c-2. Should credit be extended if the receivables turnover drops to 1.6, and 14 percent of the accounts are uncollectible? No Yes eBook & Resources eBook: Management of Accounts Receivable ©2017 McGraw-Hill Education. All rights reserved.