Question

Lyman Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are projected at 70% of sales, and its effective tax rate is 40%. If Lyman accepts this opportunity, its after-tax profits would increase by an estimated:_____.

a. $10,200.
b. $10,000.
c. $9,000.
d. $14,400.

Answer 1

Option c ($9,000) is the correct answer.

Step-by-step explanation:

The given values are:

Annual increase in sales,

= $100,000

Now,

The collection expenses will be:

=
`100,000* 15 \ percent`

=
`15,000`

Selling as well as manufacturing expenses will be:

=
`100,000* 70 \ percent`

=
`70,000`

Tax expense will be:

=
`15,000* 40 \ percent`

=
`6,000`

After-tax profits increase will be:

=
`15,000-6,000`

=
`9,000` ($)