# Question: busi 320 comprehensive problem 2 spring 2019 you have been...

###### Question details

**BUSI 320 Comprehensive Problem 2 Spring
2019**

You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit.

**Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $120,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 80% of sales. Your firm expects to pay a total of
30% of its income after expenses in taxes.**

**Compute the incremental income after taxes that would result from these projections:**

**Compute the incremental Return on Sales if these new credit customers are accepted:**

**If the receivable turnover
ratio is expected to be 4 to 1 and no other asset buildup is needed
to serve the new customers…**

**Compute the additional investment in Accounts Receivable****Compute the incremental Return on New Investment**

**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.**

**Proposal #2 would establish local collection centers
throughout the region to decrease the time it takes to convert
credit payments that are mailed in by check to cash. It is
estimated that establishing these collection centers would reduce
the average collection time by 2 days.**

**If the company currently averages $25,000 in collections per day, how many dollars will this suggested cash management system frees up?**

**If all freed up dollars would be used to pay down debt that has an interest rate of 8%, how much money could be saved each year in interest expense?**

**Do the numbers suggest that this new system should be implemented if its total annual cost is $7200? Explain.**