Question:
Office Supply Company is considering a liberal credit policy to increase sales, and expects 9% of new accounts will not be collected. Collection costs are 5% of new sales; production and selling costs are 78% and account receivable turnover is 5 times. Income taxes are 30% and an increase in sales of $80,000.
a) What is the level of accounts receivable needed to support this sales expansion?
b) What would be the incremental after tax return on investment?