September 2023 Week 6 Credit Policy Decisions FIN200 Cooper Office Supplies is considering
2024 Cooper Office Supplies is considering a more liberal credit policy in order to increase sales. Assignment Help
Week 6 Credit Policy Decisions FIN200 Cooper Office Supplies is considering 2023
Week 6 – Credit Policy Decisions FIN200 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% Collections Cost (% of new sales)………… 6% Production and Selling Costs…………….. 77% Accounts Receivable Turnover…………… 5 Income taxes………………………………. 34% Expected increase in sales………………….. $78,000 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? Added Sales……………………………………….. $78,000 Accounts uncollectible (8% of new sales)………… ($6,240) Annual Incremental revenue…………………….… $71,760 Collection costs (6% of new sales)………………… ($4,680) Production & selling costs (77% of new sales)……. ($60,060) Annual income before taxes………………………… $7,020 Taxes (34%)…………………………………………. ($2,387) Incremental Income after taxes……………………… $4,633 c. Should Cooper liberalize credit if a 15% after tax return on investment is required? Yes. The return on incremental investment is 29.7%, which exceeds the required 15%. 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? e. Given the income determined in part B and the investment determined in part D, should Cooper extend more liberal credit terms? Determine and show answer in percentage amounts.
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