Lyman Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are projected at 70% of sales, and its effective income tax rate is 40%. If Lyman accepts this sales opportunity, its after-tax profits would increase by an estimated:

Question

Quizplus · Accepted Answer

The increase in after-tax profits is calculated as follows: Increase in sales = $100,000Less: Collection expenses (15% of $100,000) = $15,000Less: Manufacturing and selling expenses (70% of $100,000) = $70,000Profit before tax = $15,000Less: Income tax (40% of $15,000) = $6,000After-tax profit = $15,000 - $6,000 = $9,000.

Lyman Company Has the Opportunity to Increase Annual Credit Sales