roblem 7-19 Credit policy decision with changing variables [LO4]

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $234,000 in additional credit sales, 15 percent are likely to be uncollectible. The company will also incur $16,500 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return.

a-1.	Calculate the incremental income after taxes.

Incremental income after taxes

$

a-2.	Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)

Return on incremental investment

%

a-3.

Should Fast Turnstiles Co. extend credit to these customers?

	Yes
	No

b-1.	Calculate the incremental income after taxes if 18 percent of the new sales prove to be uncollectible.

Incremental income after taxes

$

b-2.	Calculate the return on incremental investment if 18 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

Return on incremental investment

%

b-3.

Should credit be extended if 18 percent of the new sales prove uncollectible?

	Yes
	No

c-1.	Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 15 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

Return on incremental investment

%

c-2.

Should credit be extended if the receivables turnover drops to 1.6, and 15 percent of the accounts are uncollectible?

	Yes
	No