Credit Policy Decision

Henderson Office Supply 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 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset buildup will be required to service the new accounts.

a. What is the level of accounts receivable to support this sales expansion?

b. What would be Henderson’s incremental after tax return on investment?

c. Should Henderson liberalize credit if a 16 percent after tax return on investment is required?