"7-16. Solution:Johnson Electronicsa. Additional sales ....................................................$100,000Accounts uncollectible (10% of new sales) .........– 10,000Annual incremental revenue ................................$ 90,000Collection costs (3% of new sales) ......................– 3,000Production and selling costs (79% of new sales) .– 79,000Annual income before taxes .................................$8,000Taxes (40%) .........................................................–3,200Incremental income after taxes ............................$4,800Incremental income b.Incremental return on sales = Incremental sales = $4,800/$100,000 = 4.8% c. Receivable turnover = Sales/Receivable turnover = 6xReceivables = Sales/Receivable turnover = $100,000/6 = $16,666.67Incremental return on new average investment =$4,800/$16,666.67 = 28.80%S7-16 17. Collins Office Supplies is considering a more liberal credit policy to increase sales, butexpects that 9 percent of the new accounts will be uncollectible. Collection costs are5 percent of new sales, production and selling costs are 78 percent, and accounts receivableturnover is five times. Assume income taxes of 30 percent and an increase in sales of$80,000. 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 isrequired?Assume Collins also needs to increase its level of inventory to support new salesand that inventory turnover is four times. d. What would be the total incremental investment in accounts receivable and inventoryto support a $80,000 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?7-17. Solution:Collins Office Supplies$80,000 a. Investment in accounts receivable = = $16,0005 b. Added sales ..........................................................$ 80,000Accounts uncollectible (9% of new sales) ...........– 7,200Annual incremental revenue ................................$ 72,800Collection costs (5% of new sales) ......................– 4,000Production and selling costs (78% of new sales)– 62,400Annual income before taxes .................................$ 6,400Taxes (30%) .........................................................– 1,920Incremental income after taxes ............................$ 4,480Return on incremental investment = $4,480/$16,000 = 28%c. Yes! 28% exceeds the required return of 15%.S7-17 7-17. (Continued)$80,000 d. Investment in inventory = =$20,0004 Total incremental investmentInventory $20,000Accounts receivable 16,000Incremental investment $36,000$4,480/$36,000 = 12.44% return on investmente. No! 12.44% is less than the required return of 15%.18. Curtis Toy Manufacturing Company is evaluating the extension of credit to a new group ofcustomers. Although these customers will provide $240,000 in additional credit sales,12 percent are likely to be uncollectible. The company will also incur $21,000 in additionalcollection expense. Production and marketing costs represent 72 percent of sales. Thecompany is in a 30 percent tax bracket and has a receivables turnover of six times. No otherasset buildup will be required to service the new customers. The firm has a 10 percentdesired return on investment. a. Should Curtis extend credit to these customers? b. Should credit be extended if 14 percent of the new sales prove uncollectible? c. Should credit be extended if the receivables turnover drops to 1.5 and 12 percent ofthe accounts are uncollectible (as was the case in part a).S7-18 7-18. Solution:Curtis Toy Manufacturing Companya. Added sales .............................................................$240,000Accounts uncollectible (12% of new sales) ............ 28,800Annual incremental revenue ...................................211,200Collection costs .......................................................21,000Production and selling costs (72% of new sales) .... 172,800Annual income before taxes ....................................17,400Taxes (30%) ............................................................ 5,220Incremental income after taxes ...............................$ 12,180$240,000 Receivable turnover = 6.0x6.0 = 40,000 in new receivables $12,180 Re turn on incremental investment = = 30.45%$40,000 b. Added sales ..........................................................$240,000Accounts uncollectible (14% of new sales) .........–33,600Annual incremental revenue ................................$206,400Collection costs ....................................................–21,000Production and selling costs (72% of new sales) .–172,800Annual income before taxes .................................$12,600Taxes (30%) .........................................................–3,780Incremental income after taxes ............................$8,820$8,820 Return on incremental investment = = 22.05%$40,000 Yes, extend credit.S7-19 7-18. (Continued)c. If receivable turnover drops to 1.5x, the investment inaccounts receivable would equal $240,000/1.5 = $160,000.The return on incremental investment, assuming a 12%uncollectible rate, is 7.61%.$12,180 Return on incremental investment = = 7.61%$160,000 The credit should not be extended. 7.61% is less than thedesired 10%.19. Reconsider problem 18. Assume the average collection period is 120 days. All other factorsare the same (including 12 percent uncollectibles). Should credit be extended?7-19. Solution:Curtis Toy Manufacturing Company (Continued)First compute the new accounts receivable balance.Accounts receivable = average collection period × average dailysales240,000 120 days× =120×= $667 $80,040360 days orAccounts receivable = sales/accounts receivable turnover360 days Accounts receivable turnover = = 3x120 days $240,000/3 = $80,000Then compute return on incremental investment.$12,180=15.23% $80,000 Yes, extend credit. 15.23% is greater than 10%.S7-20 "