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Posted: January 11th, 2021
BUSI 320 Comprehensive Problem 2
BUSI 320 Comprehensive Problem 2You have
been asked to assess the expected financial impact of each of the following
proposals to improve the profitability of credit sales made by your
company. Each proposal is independent of
the other. Answer all questions. Showing your work may earn you partial
credit.Proposal #1 would extend trade credit to
some customers that previously have been denied credit because they were
considered poor risks. Sales are
projected to increase by $125,000 per year if credit is extended to these new
customers. Of the new accounts
receivable generated, 8% are projected to be uncollectible. Additional collection costs are projected to
be 3% of incremental sales, and production and selling costs are projected to
be 80% of sales. Your firm expects to
pay a total of 40% of its income after expenses in taxes.1) Compute the incremental income after taxes
that would result from these projections:2) Compute the incremental Return on Sales if
these new credit customers are accepted:If the
receivable turnover ratio is expected to be 3 to 1 and no other asset buildup
is needed to serve the new customersâ¦
3) Compute the
additional investment in Accounts Receivable
4) Compute the incremental Return on New Investment5) If your company requires a 20% Rate of
Return on Investment for all proposals, do the numbers suggest that trade
credit should be extended to these new customers? Explain.Proposal #2 would establish local
collection centers throughout the region to decrease the time it takes to
convert credit payments that are mailed in by check to cash. It is estimated that establishing these
collection centers would reduce the average collection time by 2 days.1)
If
the company currently averages $50,000 in collections per day, how many dollars
will this suggested cash management system free up?2)
If
all freed up dollars would be used to pay down debt that has an interest rate
of 6%, how much money could be saved each year in interest expense?3)
Do
the numbers suggest that this new system should be implemented if its total
annual cost is $5200? Explain.
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