Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that $5$ percent of the new accounts will be uncollectible. Collection costs are $3$ percent of new sales, production costs are $80$ percent of sales, and accounts receivable turnover is five times. Assume an increase in sales of $$67,000.$ 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 $35$ 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 five times on Cost of Goods Sold.

d$.$ What would be the total incremental investment in accounts receivable and inventory to support a $$67,000$ 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

NoHenderson Office Supplies is considering a more liberal credit policy to Increase sales, but it expects that $5$ percent of the new

accounts will be uncollectible. Collection costs are $3$ percent of new sales, production costs are $80$ percent of sales, and accounts

recelvable turnover is five times. Assume an Increase In sales of $$67,000.$ No other asset bulldup will be required to service the new

accounts.

a$.$ What is the level of Investment In accounts recelvable to support this sales expansion?

Investment In accounts recelvable

b$.$ What would be Henderson's Incremental before$-$tax return on Investment?

Return on Incremental Investment

$\%$

c$.$ Should Henderson liberalize credit If a $35$ percent before$-$tax return Is required $($opportunity cost of capltal$)?$

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 recelvable and Inventory to support a $$67,000$ 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 Iiberal credit

terms?

Yes

No