Problem 7-26 Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $620,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment All $620,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will be 79 percent of sales. The cost to carry inventory will be 5 percent of inventory. Amortization expense on plant and equipment will be 6 percent of plant and equipment. The tax rate is 20 percent. Inventory is calculated using sales and not cost of goods sold. 5x 8x 2x a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made? Accounts receivable Inventory Plant and equipment Total Investment 124000 $ $ $ 310000 b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together. Collection cont Production and selling costs Total costs related to accounts receivable c. Compute the costs of carrying inventory.
Problem 7-26 Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $620,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment All $620,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will be 79 percent of sales. The cost to carry inventory will be 5 percent of inventory. Amortization expense on plant and equipment will be 6 percent of plant and equipment. The tax rate is 20 percent. Inventory is calculated using sales and not cost of goods sold. 5x 8x 2x a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made? Accounts receivable Inventory Plant and equipment Total Investment 124000 $ $ $ 310000 b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together. Collection cont Production and selling costs Total costs related to accounts receivable c. Compute the costs of carrying inventory.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Hh2.
Transcribed Image Text:c. Compute the costs of carrying inventory.
Cost of carrying inventory
d. Compute the amortization expense on new plant and equipment.
Amortization expense
e. Add together all the costs in parts b, c, and d.
Total cost
f. Compute income after taxes.
$
Income after taxes
g. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout
this problem?
O Yes
O No
Problem 7-27
In the previous problem, if inventory had only been 2 times:
a. What would be the new value for inventory investment?
Inventory investment
b-1. What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work
toward computing income after taxes. (Round the final answer to 2 decimal places.)
Rate of return
%
b-2. Should the campaign be undertaken?
Transcribed Image Text:Problem 7-26
Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $620,000. The company will
require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:
Accounts receivable
Inventory
Plant and equipment
5x
Bx
2x
All $620,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will
be 79 percent of sales. The cost to carry inventory will be 5 percent of inventory. Amortization expense on plant and equipment will be
6 percent of plant and equipment. The tax rate is 20 percent. Inventory is calculated using sales and not cost of goods sold.
a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total
value of the investment made?
Accounts receivable
Inventory
Plant and equipment
Total Investment
$ 124000
$
$ 310000
$
b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together.
Collection cont
Production and selling costs.
Total costs related to accounts receivable
c. Compute the costs of carrying inventory.
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