Collins 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 7%
Collection costs 6% of new sales
Production and selling costs 79%
Accounts receivable turnover 6
Income taxes 34%
expected increase in sales $75,000
due to the liberal credit policy what is the level of accounts receivable needed to support this sales expansion?
To determine the level of accounts receivable needed to support the sales expansion, we first need to calculate the increase in credit sales due to the liberal credit policy.
The expected increase in sales is given as $75,000. However, since we want to find the increase in credit sales, we need to adjust this figure by deducting the percentage of uncollectable new accounts.
1. Calculate the decrease in credit sales due to uncollectable new accounts:
Decrease in credit sales = Expected increase in sales × Percentage of uncollectable new accounts = $75,000 × 7% = $5,250
Next, we need to calculate the increase in total sales by adding back the decrease in credit sales:
Increase in total sales = Expected increase in sales + Decrease in credit sales = $75,000 + $5,250 = $80,250
Now, we can calculate the increase in accounts receivable based on the accounts receivable turnover.
2. Calculate the increase in accounts receivable:
Accounts Receivable Turnover = Credit Sales / Average Accounts Receivable
Rearranging the formula to solve for Average Accounts Receivable:
Average Accounts Receivable = Credit Sales / Accounts Receivable Turnover
Since we are looking to find the increase in accounts receivable, we can multiply the average accounts receivable by the increase in total sales.
Increase in Accounts Receivable = (Average Accounts Receivable × Increase in Total Sales) - Average Accounts Receivable
To calculate Average Accounts Receivable, we need to know the current level of accounts receivable before the sales expansion.
Please provide the current level of accounts receivable, and I'll be happy to assist you further.