Week 6 � Credit Policy Decisions FIN200 Cooper Office Supplies is considering a more liberal credit policy in order to increase sales. The following data is available for the company:
Uncollectable New Accounts�����.. 8%
Collections Cost (% of new sales)���… 6%
Production and Selling Costs�����.. 77%
Accounts Receivable Turnover����� 5
Income taxes������������. 34%
Expected increase in sales����……….. $78,000
a. What is the level of accounts receivable needed to support this sales expansion?
b. What would be Cooper’s incremental income after tax on investment?
Added Sales���������������.. $78,000
Accounts uncollectible (8% of new sales)���� ($6,240)
Annual Incremental revenue��������.� $71,760
Collection costs (6% of new sales)������… ($4,680)
Production & selling costs (77% of new sales)��. ($60,060)
Annual income before taxes���������� $7,020
Taxes (34%)���������������…. ($2,387)
Incremental Income after taxes��������� $4,633
c. Should Cooper liberalize credit if a 15% after tax return on investment is required? Yes. The return on incremental investment is 29.7%, which exceeds the required 15%.
d. Assume Cooper also needs to increase its level of inventory to support new sales and that inventory turnover is 4 times. What would be the total incremental investment in accounts receivable and inventory to support the expected increase in sales?
e. Given the income determined in part B and the investment determined in part D, should Cooper extend more liberal credit terms? Determine and show answer in percentage amounts.
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