Toy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment. a. Should it extend credit to these customers? b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?
Toy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment. a. Should it extend credit to these customers? b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Toy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers will
provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000
in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax
bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new
customers. The firm has a 10% desired
a. Should it extend credit to these customers?
b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?
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