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Compute the incremental income before taxes

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Question 1

Acton Industries is considering changing its credit policy. The changes are expected to increase sales by $150,000 per year. Uncollected sales are expected to be 10% of sales and the costs of producing these additional products is expected to be 65% of sales. Acton has an A/R turnover ratio of 5 to 1.

REQUIRED:

a) Compute the incremental income before taxes.

b) What will Acton's incremental return on new sales be if these customers are accepted?

c) What will Acton's incremental return on new average investment be if these customers are accepted (there is no build-up of assets other than A/R)?

d) If Acton's management requires a return on investment above 80%, should they accept these new customers?

Reference no: EM132818348

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