the new credit manager of Kays Dpartment store plans to liberalize the firms cre
ID: 2702130 • Letter: T
Question
the new credit manager of Kays Dpartment store plans to liberalize the firms credit policy.The firm currently generates credit sales of $575,000 annually. te more lenient the credit policy is expected to produce credit sales of $750,000. The bad debt losses on additional sales are projected to be 5% despit any additional $15,000 collection expenditure.The new manager anticipates production and selling costs other than additional bad debt and collection expenses will remain at the 85% level. The firm is in the 34%tax bracket.if the firm maintains its recievables turnover 10 times,how much will the recievables balance increase,what would be Kays incremental after tax return on investment? Assuming additional inventory of $35,000 is required to support the additional sales, compute the after tax return on investment. Please show work so I will understand better..Thank you
Explanation / Answer
Additional sales (750,000-575,000) =175,000
Less expenses (production and selling at 85%)= 148,750
Bad debt on additional sales (175,000*.05)= 8,750
Additional collection expenditure 15,000
Additional pre tax income 2,500
Less taxes at 34% 850
Net income 1,650
Additiona receivables 175,000/10= 17,500
Additional inventory 35,000
ROI 1,650/(17,500+35,000)= 3.14%
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