Comiskey Fence Co. is evaluating extending credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will incur $16,200 in additional collection expenses. Production and marketing expenses represent 72 percent of sales. The company has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 20 percent desired return on investment.

a-1.Calculate the incremental income before taxes from this new group of customers.

Incremental income before taxes$

a-2.Calculate the return on incremental investment.(Round the final answer to 2 decimal place.)

Return on incremental investment%

a-3.Should Cominsky extend credit to these customers?

• Yes
• No

b-1.Calculate the incremental income before taxes from the new group of customers if 15 percent of the sales prove uncollectable.

Incremental income before taxes$

b-2.Calculate the return on incremental investment if 15 percent of the new sales prove uncollectible.(Round the final answer to 2 decimal place.)

Return on incremental investment%

b-3.Should credit be extended if 15 percent of the new sales prove uncollectible?

• No
• Yes

c-1.Calculate the return on incremental investment if the receivables turnover drops to 1.6 and 12 percent of the accounts are uncollectible (as in parta)?(Round the final answer to 2 decimal places.)

Return on incremental investment%

c-2.Should credit be extended if the receivables turnover drops to 1.6 and 12 percent of the accounts are uncollectible (as in parta)?

• Yes
• No

Problem 7-23

Reconsider Comiskey Fence. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectible).

a.Compute the return on incremental investment.(Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Return on incremental investment%

b.Should credit be extended?

• Yes
• No