Credit Policy Decisions FIN200

Week 6 � Credit Policy Decisions FIN200 Cooper Office Supplies is considering a more liberal credit policy in order to increase sales. The following data is available for the company:

Uncollectable New Accounts�����..      8%

Collections Cost (% of new sales)���…     6%

Production and Selling Costs�����..       77%

Accounts Receivable Turnover�����     5

Income taxes������������.     34%

Expected increase in sales����………..     $78,000

a. What is the level of accounts receivable needed to support this sales expansion?

b. What would be Cooper's incremental income after tax on investment?

Added Sales���������������..      $78,000

Accounts uncollectible (8% of new sales)����    ($6,240)

Annual Incremental revenue��������.�     $71,760

Collection costs (6% of new sales)������…     ($4,680)

Production & selling costs (77% of new sales)��.    ($60,060)

Annual income before taxes����������  $7,020

Taxes (34%)���������������….    ($2,387)

Incremental Income after taxes���������  $4,633

c. Should Cooper liberalize credit if a 15% after tax return on investment is required? Yes. The return on incremental investment is 29.7%, which exceeds the required 15%.

d. Assume Cooper also needs to increase its level of inventory to support new sales and that inventory turnover is 4 times. What would be the total incremental investment in accounts receivable and inventory to support the expected increase in sales?

e. Given the income determined in part B and the investment determined in part D, should Cooper extend more liberal credit terms? Determine and show answer in percentage amounts.

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