Question

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 build-up will be required to service the new accounts.

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

Short answer

The level of accounts receivables required is $16,250.

Step-by-step solution

Information provided in the question

Increase in sales = $65,000

Selling costs = 74%

Uncollectible accounts = 9%

Collection costs = 6%

Income taxes = 20%

Accounts receivables turnover = 4 times

Calculation of level of accounts receivables required to support sales expansion

The level of accounts receivables required is $16,250.

$\begin{array}{rcl}\mathrm{Investment}\mathrm{in}\mathrm{accounts}\mathrm{receivables}& =& \frac{\mathrm{Increase}\mathrm{in}\mathrm{sales}}{\mathrm{Acounts}\mathrm{receivable}\mathrm{turnover}}\\ & =& \frac{\$65,000}{4}\\ & =& \$16,250\end{array}$