Johnson Electronics is considering extending trade credit tosome customers previously considered poor risks. Sales wouldincrease by $120,000 if credit were extended to these newcustomers. Of the new accounts receivable generated, 6 percent willprove to be uncollectible. Additional collection costs will be 3percent of sales, and production and selling costs will be 71percent of sales. The firm is in the 15 percent tax bracket.
a. Compute the incremental income aftertaxes.
b. What will Johnson’s incremental return onsales be if these new credit customers are accepted? (Inputyour answer as a percent rounded to 2 decimal places.)
c. If the accounts receivable turnover ratio is4 to 1, and no other asset buildup is needed to serve the newcustomers, what will Johnson’s incremental return on new averageinvestment be? (Do not round intermediate calculations.Input your answer as a percent rounded to 2 decimalplaces.)
