17BP_c Johnson Electronics is consideri... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 3: 17BP_c (page 223)

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.
c. If the receivable turnover ratio is 3 to 1 and no other asset build-up is needed to serve the new customers, what will Johnson鈥檚 incremental return on new average investment be?

Short Answer

Expert verified

The incremental return on the new average return is 37.05%.

Step by step solution

Calculation of receivables

The receivables are $50,000.

$\begin{array}{rcl} Receivables turnover & = & \frac{Sales}{Receivables} \\ Receivables & = & \frac{Sales}{Receivables turnover} \\ Receivables & = & \frac{$ 150, 000}{3} \\ Receivables & = & $ 50, 000 \end{array}$

Calculation of incremental return on new average return

The incremental return on the new average return is 37.05%.

$\begin{array}{rcl} Incremental return on new average return & = & \frac{Incremental income}{Receivables} 脳 100 \\ = & \frac{$ 18, 525}{$ 50, 000} 脳 100 \\ = & 37.05 % \end{array}$

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Age of receivables April 30 20X1
1	2	3	4
Month of sales	Age of accounts	Amounts	Percent of amount due
April	0-30	\(131,250	____
March	31-60	\)93,750	____
February	61-90	\(112,500	____
January	91-120	\)37,500	____
Total receivables		$375,000	100%

Temporary current assets	\)1,000,000
Permanent current assets	\(2,000,000
Fixed assets	\)1,200,000
Total assets	\(4,200,000

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Short Answer

Step by step solution

Calculation of receivables

Calculation of incremental return on new average return

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