Question

Global Services is considering a promotional campaign that will increase annual credit sales by $570,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable 3 times Inventory 6 times Plant and equipment 1 time All $570,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory will be 6 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.

Answer 1

The investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios would be the following:

Accounts receivable is $190,000

Inventory is $95,000

Plant and equipment is $570,000

The Total would be of $855,000

Step-by-step explanation:

According to the given data we have the following:

Global Services is considering a promotional campaign that will increase annual credit sales by $570,000.

Therefore, in order to calculate the the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios we would have to make the following calculations:

Accounts receivable=$570,000/3=$190,000

Inventory=$570,000/6=$95,000

Plant and equipment=570,000/1=$570,000

Therefore, the Total would be of $855,000