Week 6 - Credit Policy Decisions Cooper Office Supplies is considering a more liberal credit policy in order to increase sales. The following data is available for the company

Week 6 - Credit Policy Decisions Cooper Office Supplies is considering a more liberal credit policy in order to increase sales.  The following data is available for the company

Cooper Office Supplies is considering a more liberal credit policy in order to increase sales.  The following data is available for the company

Week 6 - Credit Policy Decisions

Cooper Office Supplies W6

Cooper Office Supplies is considering a more liberal credit policy in order to increase sales.  The following data is available for the company:

Uncollectable new accounts	8%
Collection costs (% of new sales)	6%
Production and selling costs	77%
Accounts receivable turnover	5
Income taxes	34%
Expected increase in sales	$78,000	due to the liberal credit policy

a. What is the level of accounts receivable needed to support this sales expansion?

b. What would be Cooper's incremental income after tax on investment?

c. Should Cooper liberalize credit if a 15% after tax return on investment is required? Determine and show answer in percentage amounts.

d. Assume Cooper also needs to increase its level of inventory to support new sales and that inventory turnover is 4 times. What would be the total incremental investment in accounts receivable and inventory to support the expected increase in sales?

SOLUTION PREVIEW

. What would be Cooper's incremental income after tax on investment?

Particulars	Amount
Increase in sales	78,000
Less Accounts uncollectible (8% of 78,000 new sales)	-6,240
Annual incremental revenue	71,760
Less collection costs (6% of 78,000 new sales)	-4,680
Less production and selling costs (77% of 78,000)	-60,060

File name: Cooper-Office-Supplies-W6.xls File type: application/vnd.ms-excel Price: $6