Question
Archer Precision is thinking about extending trade credit to new customers. Credit sales for the year would increase by $75,000 if credit were extended to
Archer Precision is thinking about extending trade credit to new customers. Credit sales for the year would increase by $75,000 if credit were extended to those customers. Of those additional sales, 6% would be uncollectible. Archer would incur additional collection cost equal to 7% of sales, and production and selling costs would remain at 80% of sales. The firm is in a 30% tax bracket.
a. Calculate the incremental earnings after taxes.
b. Calculate the additional accounts receivable that would be created with these new credit sales. Average collection period is 30 days.
c. Calculate the return on investment (investment = amount of additional accounts receivable from part b: or use $75,000).
d. Evaluate if the extension of credit to new customers will be a good decision or not, knowing that the minimum required return is 15%.
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