BUSI 320 Comprehensive Problem 2 FALL D You have been asked to assess the expected financial...

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BUSI 320 Comprehensive Problem 2 FALL D
You have been asked to assess the expected financial impact ofeach of the following proposals to improve the profitability ofcredit sales made by your company. Each proposal is independent ofthe other. Answer all questions. Showing your work may earn youpartial credit.
Proposal #1 would extend trade credit to some customersthat previously have been denied credit because they wereconsidered poor risks. Sales are projected to increaseby $110,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 7% are projected to beuncollectible. Additional collection costs are projected to be 4%of incremental sales (whether they actually end up collected ornot), and production and selling costs are projected to be 75% ofsales. Your firm expects to pay a total of 40% of its income afterexpenses in taxes.
1)Compute the incremental income aftertaxes that would result from these projections:
2)Compute the incremental Return onSales if these new credit customers are accepted:
If the receivable turnover ratio is expected to be 5 to1 and no other asset buildup is needed to serve the newcustomers…
3)Compute the additional investment inAccounts Receivable
4)Compute the incremental Return on NewInvestment
5)If your company requires a 20% Rateof Return on Investment for all proposals, do the numbers suggestthat trade credit should be extended to these new customers?Explain.
Proposal #2 would establish local collection centersthroughout the region to decrease the time it takes to convertcredit payments that are mailed in by check to cash. It isestimated that establishing these collection centers would reducethe average collection time by 2 days.
1)If thecompany currently averages $40,000 in collections per day, how manydollars will this suggested cash management system freeup?
2)If allfreed up dollars would be used to pay down debt that has aninterest rate of 6%, how much money could be saved each year ininterest expense?
3)Do thenumbers suggest that this new system should be implemented if itstotal annual cost is $3600? Explain.

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3.6 Ratings (368 Votes)

Proposal 1 1Incremental income after taxes A Incremental Sales 110000 B Uncollectable 7 of sales 7 of 110000 7700 C Incremental Revenue AB 102300 D Additional Collection Costs 4 of incremental sales 4 of 110000 4400 E Production and Selling Cost 75 of See Answer

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BUSI 320 Comprehensive Problem 2 FALL DYou have been asked to assess the expected financial impact ofeach of the following proposals to improve the profitability ofcredit sales made by your company. Each proposal is independent ofthe other. Answer all questions. Showing your work may earn youpartial credit.Proposal #1 would extend trade credit to some customersthat previously have been denied credit because they wereconsidered poor risks. Sales are projected to increaseby $110,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 7% are projected to beuncollectible. Additional collection costs are projected to be 4%of incremental sales (whether they actually end up collected ornot), and production and selling costs are projected to be 75% ofsales. Your firm expects to pay a total of 40% of its income afterexpenses in taxes.1)Compute the incremental income aftertaxes that would result from these projections:2)Compute the incremental Return onSales if these new credit customers are accepted:If the receivable turnover ratio is expected to be 5 to1 and no other asset buildup is needed to serve the newcustomers…3)Compute the additional investment inAccounts Receivable4)Compute the incremental Return on NewInvestment5)If your company requires a 20% Rateof Return on Investment for all proposals, do the numbers suggestthat trade credit should be extended to these new customers?Explain.Proposal #2 would establish local collection centersthroughout the region to decrease the time it takes to convertcredit payments that are mailed in by check to cash. It isestimated that establishing these collection centers would reducethe average collection time by 2 days.1)If thecompany currently averages $40,000 in collections per day, how manydollars will this suggested cash management system freeup?2)If allfreed up dollars would be used to pay down debt that has aninterest rate of 6%, how much money could be saved each year ininterest expense?3)Do thenumbers suggest that this new system should be implemented if itstotal annual cost is $3600? Explain.