1. Receivable turnover = 360/75 = 4.8 Profitability of additional sales = $9 million X .2 = $1,800,000 Additional receivables associated with the new sales

= $9 million/4.8 = $1,875,000 Additional investment in receivables associated with the new sales

= $1,875,000 X .8 = $1,500,000 New level of receivables associated with the oripal sales

= $60 million/4.8 = $12,500,000 Old level of receivables associated with the original sales

= $60 million/8 = $7,500,000 Incremental receivable investment, original sales

= $5,000,000 480 Part V Liquidity and Working Capital Management Total increase in receivable investment

= $1.5 million + $5 million = $6,500,000 Carrying cost of additional investment = .20 X $6.5 million = $1,300,000 As the incremental carrying cost is less than the incremental profitability, the company should lengthen its credit period from 30 to 60 days.