Fast Turnstiles Co. is evaluating the extension of credit to a new group of cust
ID: 2744009 • Letter: F
Question
Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $378,000 in additional credit sales, 15 percent are likely to be uncollectible. The company will also incur $17,300 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return.
Calculate the incremental income after taxes.
Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)
Should Fast Turnstiles Co. extend credit to these customers?
Calculate the incremental income after taxes if 18 percent of the new sales prove to be uncollectible.
Calculate the return on incremental investment if 18 percent of the new sales prove to be uncollectible.(Input your answer as a percent rounded to 2 decimal places.)
Should credit be extended if 18 percent of the new sales prove uncollectible?
Calculate the return on incremental investment if the receivables turnover drops to 2.0, and 15 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)
Should credit be extended if the receivables turnover drops to 2.0, and 15 percent of the accounts are uncollectible?
Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $378,000 in additional credit sales, 15 percent are likely to be uncollectible. The company will also incur $17,300 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return.
Explanation / Answer
a-1
Additional sales = 378,000
Uncollectible value = additional sales x 15%
= 378,000 x 15%
= 56,700
Production and marketing expense = additional sales x 70%
= 378,000 x 70%
= 264,600
Incremental income after taxes = (Additional sales – uncollectible value – production and marketing expense – collection expense) x (1- tax rate)
= (378,000 -56,700 -264,600 -17,300) x (1-0.30)
= 39,400 x 0.70
= 27,580
So incremental income after taxes would be 27,580
a-2
Incremental receivables = incremental sales / receivables turnover
= 378,000/4
= 94500
Return on incremental investment = incremental income after taxes/ Incremental receivables
= 27,580 / 94,500
= 29.19%
a-3
Desired return on invested is 8% whereas actual return is going to be 29.19%. Since actual return is greater than desired return, the credit should be extended.
b-1
Uncollectible value = 378000 x 18%
= 68,040
Incremental income after taxes = (Additional sales – uncollectible value – production and marketing expense – collection expense) x (1- tax rate)
= (378,000 -68040-264,600 -17,300) x (1-0.30)
= 28060 x 0.70
= 19,642
b-2
Return on incremental investment = incremental income after taxes/ Incremental receivables
= 19,642 / 94,500
= 20.79%
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