Office Supply Company is considering a liberal credit policy to increase sales, and expects 9% of new accounts will not be collected. Collection costs are 5% of new sales; production and selling costs are 78% and account receivable turnover is 5 times. Income taxes are 30% and an increase in sales of $80,000.
a) What is the level of accounts receivable needed to support this sales expansion?
b) What would be the incremental after tax return on investment?© BrainMass Inc. brainmass.com October 1, 2020, 11:34 pm ad1c9bdddf
Account receivable turnover=5
Increase in sales=$80,000
Investment required in account receivable=Increase in sales/Account receivable turnover
Investment required in Accounts receivable=$16,000
Let us calculate ...
The solution describes the steps to calculate level of accounts receivable and incremental after tax return after implementing a liberal credit policy.