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Chapter 3: 17BP_a (page 223)

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.

a. Compute the incremental income after taxes.

Short Answer

Expert verified

The incremental income after taxes is $18,525.

Step by step solution

01

Meaning of incremental income

The incremental income refers to the additional income generated by the organization after an increase in its sales. The incremental income does not consider the overhead costs and only the production costs of additional production.

02

Calculation of incremental income after taxes

The incremental income after taxes is $18,525.

Particulars

Amount

Additional sales

$150,000

Accounts uncollectible (5% of additional sales)

($7,500)

Annual incremental revenue

$142,500

Collection costs (2% of additional sales)

($3,000)

Production and selling costs (74% of additional sales)

($111,000)

Annual income before taxes

$28,500

Taxes (35%)

($9,975)

Incremental income after taxes

$18,525

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Most popular questions from this chapter

Explain the similarities and differences of lockbox systems and regional collection offices

Colter Steel has \(4,200,000 in assets.

Temporary current assets

\)1,000,000

Permanent current assets

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Fixed assets

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Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.

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Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

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