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.

f. Subtract the answer from part e from the sales figure of $450,000 to arrive at income before taxes. Subtract taxes at a rate of 30 percent to arrive at income after taxes.

Step by step solution

01

Calculation of income before taxes

The income before taxes is $408,750.

$\begin{array}{rcl}\mathrm{Income}\mathrm{before}\mathrm{taxes}& =& \mathrm{Sales}-\mathrm{Total}\mathrm{cost}\\ & =& \$450,000-\$41,250\\ & =& \$408,750\end{array}$

02

Calculation of income after taxes

The income after taxes is $286,125.

$\begin{array}{rcl}\mathrm{Income}\mathrm{after}\mathrm{taxes}& =& \mathrm{Income}\mathrm{before}\mathrm{taxes}\times \left(1-\mathrm{Tax}\mathrm{rate}\right)\\ & =& \$408,750\times \left(1-30\%\right)\\ & =& \$286,125\end{array}$

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