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ABC Corp is considering an ‘easing’ of credit policy to expand sales. The following data has...

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Finance

ABC Corp is considering an ‘easing’ of credit policy toexpand sales. The following data has been assembled:

Additional Sales: $1,000,000

Production/marketing Costs= 60% of Sales.

Collection Costs = 12% of Sales.

Bad Debts= 16% of sales.

Tax Rate = 10%

Accts Receivable turnover = 5

Inventory Turnover= 4

Cost of Capital= 15%

Q1:Project Net Income (after taxes) on additionalsales.

Q2:What is the additional required investment inInventory?

Q3 :What is the additional required investment inA/R?

Q4 :What is the return on the total additionalinvestment?

Q5 :Should the company ease it’s credit policy?Justifyresponse.

Answer & Explanation Solved by verified expert
4.4 Ratings (753 Votes)
1 Additional Sales 1000000 Productionmarketing Costs 600000 60Sales Collection Costs 120000 12Sales Bad Debt Write Off 160000 16Sales Profit Before Tax 120000 Sales    See Answer
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