Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 10 percent of the new accounts will be uncollectible. Collection costs are 4 percent of new sales, production costs are 76 percent of sales, and accounts receivable turnover is four times. Assume an increase in sales of $78,000. No other asset buildup will be required to service the new accounts.

a. What is the level of investment in accounts receivable to support this sales expansion?

Investment in accounts receivable $

b. What would be Hendersons incremental beforetax return on investment?

Return on incremental investment %

c. Should Henderson liberalize credit if a 30 percent beforetax return is required (opportunity cost of capital)?

multiple choice 1

Yes

No

Assume Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is five times on Cost of Goods Sold.

d. What would be the total incremental investment in accounts receivable and inventory to support a $78,000 increase in sales?

Total incremental investment $

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

multiple choice 2

Yes

No