Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $700,000, a high 12% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 46%.
a) Calculate Tanner's incremental net income on the new sales.
b) Assume Tanner has a receivables turnover of 5. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment.
c) Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?