Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Return on incremental investment % b. Should credit be extended to the new group of customers? No Yes
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Return on incremental investment % b. Should credit be extended to the new group of customers? No Yes
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
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Question
![Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000
in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection
expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup
will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72
days.
a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day
year.)
Return on incremental investment
%
b. Should credit be extended to the new group of customers?
No
Yes](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6cf80ad8-016a-46cf-a57f-20124539f969%2F4c51f082-3030-48f2-aa44-824eece5cebd%2Fccbx5s8_processed.png&w=3840&q=75)
Transcribed Image Text:Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000
in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection
expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup
will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72
days.
a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day
year.)
Return on incremental investment
%
b. Should credit be extended to the new group of customers?
No
Yes
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