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Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit were extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. The firm is in the 15 percent tax bracket.

a. Compute the incremental income after taxes.

b. What will Johnson's incremental return on sales be if these new credit customers are accepted?
*Note: Input your answer as a percent rounded to 2 decimal places.*

c. If the accounts receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be?
*Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.*

Answer :

The incremental income after taxes for Johnson Electronics, considering the extension of trade credit to the new customers, would be $79,900.

What is Johnson's incremental return on sales if the new credit customers are accepted?

To calculate the incremental return on sales, we need to consider the additional income generated from sales to the new customers, along with the associated costs and taxes. The formula for incremental return on sales (IROS) is:

[tex]\[ IROS = \frac{Incremental\ Income\ after\ Taxes}{Incremental\ Sales} \times 100 \][/tex]

1. Incremental Sales: Sales increase by $220,000 due to the extension of credit.

[tex]\[ Incremental\ Sales = $220,000 \][/tex]

2. Incremental Income before Taxes: We need to calculate the incremental income before taxes, considering the collection costs, production and selling costs, and the uncollectible amount.

i. Collection Costs: 5% of incremental sales

\[ Collection\ Costs = 5\% \times $220,000 \]

ii. Production and Selling Costs: 70% of incremental sales

\[ Production\ and\ Selling\ Costs = 70\% \times $220,000 \]

iii. Uncollectible Amount: 10% of incremental sales

\[ Uncollectible\ Amount = 10\% \times $220,000 \]

iv. Incremental Income before Taxes

[tex]\[ Incremental\ Income\ before\ Taxes = Incremental\ Sales - Collection\ Costs - Production\ and\ Selling\ Costs - Uncollectible\ Amount \][/tex]

3. Taxes: The firm is in the 15% tax bracket. We need to calculate the tax amount on the incremental income.

[tex]\[ Taxes = 15\% \times Incremental\ Income\ before\ Taxes \][/tex]

4. Incremental Income after Taxes

[tex]\[ Incremental\ Income\ after\ Taxes = Incremental\ Income\ before\ Taxes - Taxes \][/tex]

After calculating the values, we can find the incremental return on sales by plugging them into the IROS formula.

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