QUESTION 4 [20 MARKS]

4.1 Decor Furnishers is considering extending credit to some customers who may be at risk of defaulting in payment. Sales will increase by R450 000 if credit is granted to these customers. From the new accounts receivable generated, 10% is expected to be uncollectible. Additional collection costs will be 4% of sales, and the production and selling costs will be 70% of sales. The firm is in the 30% tax bracket.

Required:

4.1.1 Calculate the incremental profit/loss after tax. (7)

4.1.2 Determine the incremental return on sales if these new credit customers are accepted. (3)

4.1.3 Briefly explain any 3 methods used to collect overdue accounts. (3)