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 $6$ percent of new sales, production costs are $79$ percent of sales, and accounts

receivable turnover is four times. Assume an increase in sales of $$70,000.$ 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 $20$ percent before$-$tax return is required $($opportunity cost of capital$)?$

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 $$70,000$ 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?

Yes

No