Question

for Business Expert-Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent,and accounts receivable turnover is five times. Assume income taxes of30 percent and an increase in sales of $80,000. No other asset buildup will berequired to service the new accounts.
aWhat is the level of accounts receivable needed to support this salesexpansion?bWhat would be Collins’s incremental aftertax return on investment?c. Should Collins liberalize credit if a 15 percent aftertax return on investmentis required?Assume Collins also needs to increase its level of inventory to supportnew sales and that inventory turnover is four times.d.What would be the total incremental investment in accounts receivableandinventory to support an $80,000 increase in sales?e.given B&Dshould Collins extend more liberal credit terms?