Stevens Analytics is considering extending trade credit to some customers previo

Question

Stevens Analytics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $680,000 if credit is extended to these new customers. Of the new accounts receivable generated, 11 percent will prove to be uncollectible. Additional collection costs will be 7 percent of sales, and production and selling costs will be 65 percent of sales. The firm is in the 20 percent tax bracket.

Compute the incremental income after taxes.

b. What will Steven's incremental return on sales be if these new credit customers are accepted?

Compute the incremental income after taxes.

Explanation / Answer

Sales increase $680,000 Collections =89%*680000 $          6,05,200 Cost of Collection =7%*680000 $             47,600 Production and Selling Cost =65%*680000 $          4,42,000 Net Income =605200-47600-442000 $          1,15,600 Tax =20%*115600 $             23,120 Incremental Income after tax =115600-23120 $             92,480 Incremental return on sales =92480/680000 13.60%

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