Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production costs are 74 percent of sales, and accounts receivable turnover is four times. Assume an increase in sales of $65,000. No other asset buildup will be required to service the new accounts. a. What is the level of investment in accounts receivable to support this sales expansion? $ Investment in accounts receivable b. What would be Henderson's incremental before-tax return on investment? Return on incremental investment c. Should Henderson liberalize credit if a 25 percent before-tax return is required (opportunity cost of capital)? Yes O No Assume Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times on Cost of Goods Sold.

Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production costs are 74 percent of sales, and accounts receivable turnover is four times. Assume an increase in sales of $65,000. No other asset buildup will be required to service the new accounts. a. What is the level of investment in accounts receivable to support this sales expansion? $ Investment in accounts receivable b. What would be Henderson's incremental before-tax return on investment? Return on incremental investment c. Should Henderson liberalize credit if a 25 percent before-tax return is required (opportunity cost of capital)? Yes O No Assume Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times on Cost of Goods Sold.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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