Curtis Toy Manufacturing Company is evaluating the extension of credit to a new group of
customers. 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 additional
collection expense. Production and marketing costs represent 72 percent of sales. The
company is in a 30 percent tax bracket and has a receivables turnover of six times. No other
asset buildup will be required to service the new customers. The firm has a 10 percent
desired 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 of
the accounts are uncollectible (as was the case in part a).
The solution explains how to decide if credit should be extended to new customers