- Incremental income after taxes
Sales = $160,000, collectible account receivable = 90% 0f $160,000
Total costs = production/sales cost + collection costs = 78% + 2% = 80%
Incremental income before tax = 100% – 80% = 20%
=20% 0f $144,000 = $28,800
Incremental income after tax = 100% – 40% = 60%
60% of $28,800
- Incremental return on sales
Incremental return on sales = net income before tax/sales
- Additional investments in accounts receivable
Receivables turnover ratio = net receivable sales/average net receivables
4 = $144,000/ average net receivables
Average net receivables = $36,000
- Incremental return on new investment
$36,000/$160,000 x 100
- If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.
A 20% rate of return on investment is a good return and thus the trade credit should be extended to the customers. This is because the trade credit has increased the sales and according to the above collections the rate of collection of the debts is fast enough to run operations and to realize profits.
If the company currently averages $40,000 in collections per day, how many dollars will this suggested cash management system free up?
Daily sales volume = $40,000
Average collection period = 2 days
Amount freed up = $40,000 x 2 = $80,000 x 365
If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?
Amount saved on interest rates = 0.16 x $80,000 =$12,800 x 365
Do the numbers suggest that this new system should be implemented if its total annual cost is $5200? Explain.
Yes the new system should be implemented because the annual costs are way below the feed up cash and saves a lot on interest expenses.