/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} 19BP_a Fast Turnstiles Co. is evaluatin... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 3: 19BP_a (page 223)

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide \(180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur \)16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset build-up will be required to service the new customers. The firm has a 10 percent desired return.

a. Calculate the incremental income after taxes and the return on incremental investment. Should Fast Turnstiles Co. extend credit to these customers?

Short Answer

Expert verified

The incremental income after-tax is $12,172, the incremental after-tax return on investment is 27% and the company should extend credit to these customers.

Step by step solution

01

Information provided in the question

Increase in sales = $180,000

Production and marketing costs = 72%

Uncollectible accounts = 12%

Collection costs = $16,200

Income taxes = 34%

Accounts receivables turnover = 4 times

02

Calculation of incremental income after taxes

The incremental income after taxes is $12,172.

Particulars

Amount

Additional sales

$180,000

Accounts uncollectible (12% of additional sales)

($21,600)

Annual incremental revenue

$158,400

Collection costs

($16,200)

Production and marketing costs (72% of additional sales)

($129,600)

Annual income before taxes

$12,600

Taxes (34%)

($4,284)

Incremental income after taxes

$12,172

03

Calculation of investment in accounts receivables

The investment required in accounts receivables is $45,000.

Investmentinaccountsreceivables=IncreaseinsalesAccountsreceivablesturnover=$180,0004=$45,000

04

Calculation of incremental after-tax return on investment

The incremental after-tax return on investment is 27%.

Incrementalaftertaxreturnoninvestment=IncrementalincomeInvestmentinreceivables脳100=$12,172$45,000脳100=27%

05

Decision for extending credit

The company requires an incremental return of 10% but this plan has an incremental return of 27%, therefore, the company should provide credit to these customers.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? (Hint: Divide the interest payments in 18a by the amount of total funds provided for the six months and multiply by 12.)

Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 240,000 reals in Brazil worth 170,000 dollars. It drew 12 percent interest, but the Brazilian real declined 24 percent against the dollar.

b. What is the value of its holdings, based on U.S. dollars, at year-end if instead it drew 9 percent interest and the real went up by 13 percent against the dollar?

What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear鈥檚 earnings before interest and taxes are \)240,000. Determine Lear鈥檚 earnings after taxes under this financing plan. The tax rate is 30 percent.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $240,000. What will be Lear鈥檚 earnings after taxes? The tax rate is 30 percent.

c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

c. What will the average inventory be?
See all solutions

Recommended explanations on Business Studies Textbooks

Introduction to Business

Read Explanation

Organizational Behavior

Read Explanation

Accounting

Read Explanation

Public Relations Business Studies

Read Explanation

Managers

Read Explanation

Financial Performance

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.