I have went through my textbook a million times trying to figure out part C of this question. Can someone explain it to me so I can understand what it is asking of me.



17. Collins Office Supplies is considering a more liberal credit policy to increase
sales, but expects that 9 percent of the new accounts will be uncollectible. Collection
costs are 5 percent of new sales, production and selling costs are 78 percent,
and accounts receivable turnover is five times. Assume income taxes of
30 percent and an increase in sales of $80,000. No other asset buildup will be
required to service the new accounts.


a. What is the level of accounts receivable needed to support this sales
expansion?
Accounts Receivable=80000/5=$16,000

b. What would be Collins’s incremental aftertax return on investment?
Additional Sales……………………………………………$80,000
Accounts uncollectible (9%)……………………………… $7,200
Annual incremental revenue……………………………... $72,800
Collection costs (5%)……………………………………… $4,000
Production & selling costs (78%)………………………… $62,400
Annual income before taxes………………………………. $6,400
Taxes (30%)………………………………………………... $1,920
Annual incremental income after taxes………………….. $4,480
Return on Investment- 4,480/16000=28%
Collins’s incremental aftertax return would be 28%

c. Should Collins liberalize credit if a 15 percent aftertax return on investment
is required? Assume Collins also needs to increase its level of inventory to support
new sales and that inventory turnover is four times.

d. What would be the total incremental investment in accounts receivable and
inventory to support an $80,000 increase in sales?


e. Given the income determined in part b and the investment determined in
part d, should Collins extend more liberal credit terms?