Global Services is considering a promotional campaign that will increase annual credit sales by \(450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts receivable	2X
Inventory	6X
Plant and equipment	1X

All \)450,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent.

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

Step by step solution

01

Information provided in question

Sales = $450,000

Collection costs = 6%

Production and selling cost = 71%

02

Calculation of collection costs

The collection cost is $27,000.

$\begin{array}{rcl}\mathrm{Collection}\mathrm{cost}& =& \mathrm{Sales}\times \mathrm{Collection}\mathrm{costs}\\ & =& \$450,000\times 6\%\\ & =& \$27,000\end{array}$

03

Calculation of production and selling cost

The production and selling cost is $319,500.

$\begin{array}{rcl}\mathrm{Production}\mathrm{and}\mathrm{selling}\mathrm{cost}& =& \mathrm{Sales}\times \mathrm{Production}\mathrm{and}\mathrm{selling}\mathrm{cost}\\ & =& \$450,000\times 71\%\\ & =& \$319,500\end{array}$

04

Calculation of total collection and production and selling cost

The total collection and production and selling cost is $346,500.

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}& =& \mathrm{Collection}\mathrm{cost}+\mathrm{Production}\mathrm{and}\mathrm{selling}\mathrm{cost}\\ & =& \$27,000+\$319,500\\ & =& \$346,500\end{array}$

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