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Problem 7-23

Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers will provide $108,000 in additional credit sales, 8 percent are likely to be uncollectible. The company will incur $15,800 in additional collection expenses. Production and marketing expenses represent 71 percent of sales. The company has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 16 percent desired return on investment.

a-1. Calculate the incremental income before taxes from this new group of customers.

Incremental income before taxes $

a-2. Calculate the return on incremental investment. (Round the final answer to 2 decimal place.)

Return on incremental investment %

a-3. Should Cominsky extend credit to these customers?

multiple choice 1

Yes

No

b-1. Calculate the incremental income before taxes from the new group of customers if 11 percent of the sales prove uncollectable.

Incremental income before taxes $

b-2. Calculate the return on incremental investment if 11 percent of the new sales prove uncollectible. (Round the final answer to 2 decimal place.)

Return on incremental investment %

b-3. Should credit be extended if 11 percent of the new sales prove uncollectible?

multiple choice 2

No

Yes

c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6 and 8 percent of the accounts are uncollectible (as in part a)? (Round the final answer to 2 decimal places.)

Return on incremental investment %

c-2. Should credit be extended if the receivables turnover drops to 1.6 and 8 percent of the accounts are uncollectible (as in part a)?

multiple choice 3

Yes

No

Problem 7-24

Reconsider Comiskey Fence. Assume the average collection period is 90 days. All other factors are the same (including 8 percent uncollectible).

a. Compute the return on incremental investment. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Return on incremental investment %

b. Should credit be extended?

multiple choice 4

Yes

No

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