Problem: Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide 180,000 in additional credit sales, 12 percent are likely to be uncollectible. The Company will also incur 15,700 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 34 percent tax bracket and has receivables turnover of five times. No other asset buildup will be required to service the new customer.The firm has 10 percent desired return.
1) Should Comiskey Fence Co. extend credit to these customers If Neon Light Company can earn 9 percent per annum on freed-up funds, how much will the income be?
2) Should credit be extended if 15 percent of the new sales prove uncollectible?
3) Should credit be extended if the receivables turnover drops to 1.5, and 12 percent of the accounts are uncollectible (as in part 1)?