Problem

Fashy Fashioners is considering extending credit to some customers who may be at risk(defaulting in payment). Sales will increase by R400 000 if credit is granted to these customers. From the new accounts receivable, 12% is expected to be uncollectible. Additional colletion cost will be 4% of sales, and the production and selling cost will be 70% of sales. The firm is in the 30% tax bracket.

Required:

1. Calculate the incremental profit/ loss after tax.

2. Determine the incremental return on sales if these new credit customers are accepted.