Question

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $414,000 in additional credit sales, 8% are likely to be uncollectible. The company will also incur $17,400 in additional collection expense. Production and marketing costs represent 76% of sales. The firm is in a 35% tax bracket and has a receivables turnover of five times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return.

A-1. Calculate the incremental income after taxes.A-2. Calculate the return on incremental investment. A-3. Should Fast Turnstiles Co. extend credit to these customers?A. YesB. NoB-1. Calculate the incremental income after taxes if 11% of the new sales prove to be uncollectible.B-2. Calculate the return on incremental investment if 11% of the new sales prove to be uncollectible. B-3. Should credit be extended if 11% of the new sales prove uncollectible?A. YesB. NoC-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 8% of the accounts are uncollectible. C-2. Should credit be extended if the receivables turnover drops to 1.6, and 8% of the accounts are uncollectible?A. NoB. Yes

Answer 1

Follows are the solution to this question:

Step-by-step explanation:

In point A-1:

Calculating the value of Incremental sales after tax:

Further revenues= $414,000

Recognize(Less)=Costs

Debt worth =$33,120

Set Exp. = $17,400

Production and commercialization cost= $314,640

Pre-sales tax =$48,840.

Lower: 35% tax = $17,094

Incremental tax income =$31,746

In point A-2:

Determine profits for extra expenditure

Extra spending on debts
`= ( \$ 414,000)/(\$ 5)`

`= \$ 82,800.`

Return on the Expenditure
`= (\$ 31746)/( \$ 82800)`

`= 38.34 \%`

In point A-3:

Yeah, For the Fast Turnstiles company must provide certain consumers with loans.

In point B-1:

Incremental taxes after-tax calculation:

Further sales = $ 414,000

Return: Costs

gross debt= $45,540

Set Exp = $17,400

Cost for production and marketing = $314,640

Net profits=$ 36,420

Without tax 35% = $12,747

Incremental tax revenue= $23,673

In point B-2:

Determine profits for extra expenditure

Extra investment in debts
`= ( \$ 414,000 )/( \$ 5)`

`= \$ 82,800`

Incremental return on that investment
`= (\$ 23673)/(\$ 82800)`

`= 28.59 \%`

In point B-3:

Yeah, The Fast Turnstiles company must provide to certain consumers to credit.

In point C-1:

The incremental tax revenue estimate

$414,000 = excess revenue

Remember Costs

Debt worth= $ 33,120

set Exp = $17,400

Production and commercialization cost= $314,640

Pre- sales tax = $48,840.

Less: 35% Tax = $17,094

Incremental tax income= $31,746

Calculate profits for extra expenditure

Extra Accounting Investment
`= (\$ 414000)/(1.6)`

`= \$ 258750`

Incremental Return
`= \frac{\$ 31,746} {\$ 258,750}`

`= 12.27 \%`

In point C-2:

Yeah, its credit should be granted to all these consumers through Fast Turnstiles company limited.