Johnson Electronics is considering extending trade credit to some customers prev
ID: 2693462 • Letter: J
Question
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $180,000 if credit is extended to these new customers. Of the new accounts receivable generated, 6 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. The firm is in the 25 percent tax bracket. (a) Compute the incremental income after taxes. (Omit the "$" sign in your response.) Incremental income after taxes $ (b) What will JohnsonExplanation / Answer
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $180,000 if credit is extended to these new customers. Of the new accounts receivable generated, 6 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 75 percent of sales. The firm is in the 25 percent tax bracket. (a) Compute the incremental income after taxes. (Omit the "$" sign in your response.) Incremental income after taxes $
Solution: Johnson Electronics
a. Additional sales................................................... $180,000
Accounts uncollectible (6% of new sales)......... 6,000
Annual incremental revenue................................ $174,000
Collection costs (6% of new sales)...................... 108,000
Production and selling costs (75% of new sales)......................................... 135,000
Annual income before taxes................................ $ 8,000
Taxes (25%)........................................................ 3,200
Incremental income after taxes............................ $ 4,800
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