Problem: The account under consideration was Monique Fashion. They were asking for $1 million for credit purchases. Based on Monique's Dun &Bradstreet rating and other industry data, there appeared to be a five percent probability of non-payment if credit were extended. The collection costs to service the account were four percent of sales and the production and selling costs were 85percent of sales. Any profits would be taxed at a 35 percent rate. Ruth and Jim determined that accounts receivable turnover would be three times. The firm had a required return on investment of 14 percent.
Required:
Question 1: Using techniques form making the sales to Monique Fashion Stores.
Question 2: Assume the only new investment would be in accounts receivable. Based on the turnover ratio of three times, what would the investment in accounts receivable be?
Question 3: Compute the return on accounts receivable based on your answer to questions one and two.
Question 4: Given that the firm has a required return on investment of 14percent, should Landis Apparel Co. sell to Monique Fashion Stores?
Question 5: If the account receivable turnover ratio was four times and the other percentages were the same, should Landis Apparel Co make the sales. Explain in detail and provide authentic answer.