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Chapter 3: 17BP_c (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.

c. If the receivable turnover ratio is 3 to 1 and no other asset build-up is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

Short Answer

Expert verified

The incremental return on the new average return is 37.05%.

Step by step solution

01

Calculation of receivables

The receivables are $50,000.

Receivablesturnover=SalesReceivablesReceivables=SalesReceivablesturnoverReceivables=$150,0003Receivables=$50,000

02

Calculation of incremental return on new average return

The incremental return on the new average return is 37.05%.

Incrementalreturnonnewaveragereturn=IncrementalincomeReceivables×100=$18,525$50,000×100=37.05%

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