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 70% of sales, and its effective tax rate is 40%. If Lyman should accept this opportunity, the company's after-tax profits would increase by:

A.$9,000.
B. $10,000.
C. $10,200.
D. $14,400.
E. Some amount other than those given above.

Answer 1

A.$9,000

Step-by-step explanation:

The increase in the Lyman company after tax profit shall be calculated as follows:

Increase in credit sales $100,000

Less:expenses for collecting sales ($15,000)

(15%*$100,000)

Less:Manufacturing and selling expenses ($70,000)

(70%*$100,000)

Profit before tax $15,000

Less: taxation(40%*15,000) ($6,000)

Profit after tax $9,000

So based on the above calculations, the answer is A.$9,000