Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that $8$ percent of the new accounts will be uncollectible. Collection costs are $5$ percent of new sales, production costs are $78$ percent of sales, and accounts receivable turnover is five times. Assume an increase in sales of $$60,000.$ 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 Henderson$$s incremental before$-$tax return on investment?

Return on incremental investment $\%$

c$.$ Should Henderson liberalize credit if a $25$ percent before$-$tax 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 four times on Cost of Goods Sold.

d$.$ What would be the total incremental investment in accounts receivable and inventory to support a $$60,000$ 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