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October 20, 2014

Homework Help: FIN/200

Posted by Brianna on Friday, April 2, 2010 at 7:49pm.

Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible.
Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is 4 times.
Assume income taxes of 35 percent and an increase in sales of $100,000
No other asset buildup will be required to service the new accounts.
a What is the level of accounts receivable to support this sales expansion?
b What would be Collins’s incremental aftertax return on investment?
c Should Collins liberalize credit if a 15 percent aftertax return on investment is required?
Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times.
d What would be the total incremental investment in accounts receivable and inventory to support a $100,000 increase in sales?
e Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms?

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