Problems 7-26 and 7-27 Inventory at Cost Basis

Problem 7-26

Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $484,000. The company has a 60% cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts receivable	5x
Inventory	8x
Plant and equipment	2x

All $484,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will be 75 percent of sales. The cost to carry inventory will be 10 percent of inventory. Amortization expense on plant and equipment will be 4 percent of plant and equipment. The tax rate is 30 percent. Inventory is calculated using cost of goods sold and not sales.

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made?

Accounts receivable	$
Inventory	$
Plant and equipment	$
Total Investment	$

b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together.

Collection cost	$
Production and selling costs	$
Total costs related to accounts receivable	$

c. Compute the costs of carrying inventory.

Cost of carrying inventory $

d. Compute the amortization expense on new plant and equipment.

Amortization expense $

e. Add together all the costs in parts b, c, and d.

Total cost $

f. Compute income after taxes.

Income after taxes $

g. If the firm has required return on investment of 18 percent, should it undertake the promotional campaign described throughout this problem?

multiple choice 1

Yes

No

Problem 7-27

In the previous problem, if inventory had only been 2 times:

a. What would be the new value for inventory investment?

Inventory investment $

b.1 What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing income after taxes. (Round the final answer to 1 decimal place.)

Rate of return %

b.2 Should the campaign be undertaken?

multiple choice 2

Yes

No