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Studying effects of more liberal credit policy

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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?

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Solution Summary

The solution describes the steps to calculate level of accounts receivable and incremental after tax return after implementing a liberal credit policy.

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Solution:

a)
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

b)
Let us calculate ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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