Johnson Electronics is considering extending trade credit to some customers prev

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. B) What will Johnson’s incremental return on sales be if these new credit customers are accepted? C) If the accounts receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

Explanation / Answer

Johnson Electronics Details Amt $ Incremental Revenue               180,000 Addnl.Production & Selling cost@75%               135,000 Additional Collection cost @6%                 10,800 Additional Bad debt @6%                 10,800 Incremental Income before Tax                 23,400 Incremental Tax @25%                   5,850 A. Incremental Net Income after Tax                 17,550 B. Incremental Return on Sales=17550/180000 = 9.75% Accounts Receivable TO=4:1 Incremental Average Accounts Reveivable Investment =Incremental sales/4=                 45,000 C Return on Incremental investment in Accounts Receivable =17550/45000 39.0%

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