Proposal #1 would extend trade credit to some customers that previously have been denied credit because...

3.8 Ratings (649 Votes)


	A	Increase in sales	$150,000
	B=0.07*A	Amount expected to be Uncollectable	$10,500
	C=0.03*A	Additional collection cost	$4,500
	D=A-B-C	Net Increase in sales Revenue	$135,000
	E=0.8*A	Increase in production and selling cost	$120,000
	F=D-E	Increase in before tax income	$15,000
	G=0.4*F	Tax expense	$6,000
1)	H=F-G	Incremental income after taxes	$9,000
2)	I=H/A	IncrementalReturn on Sales	0.06
		IncrementalReturn on Sales(percentage)	6%

	J	Receivable turnover Ratio	3
		Receivable turnover Ratio=Sales/Accounts Receivable
3)	K=A/J	Additional investment in Accounts receivable	$50,000

4)	L=H/K	Incremental return on new investment	0.18
		Incremental return on new investment(Percentage)	18%

5)		Trade should not be extended to these new customers
		Because return on investment is less than required return of 20%

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