Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 6 percent of the new accounts will be uncollectible. Collection costs are 6percent of new sales, production costs are 78 percent of sales, and accounts receivable turnover is four times. Assume an increase in sales of $80,000. 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 beforetax return on investment?

Return on incremental investment%

c.Should Henderson liberalize credit if a 25 percent beforetax 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 $80,000 increase in sales?

Total incremental investment$

e.Given the income determined in partband the investment determined in partd, should Henderson extend more liberal credit terms?

• Yes
• No