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 70 percent of sales,and its effective tax rate is 40 percent.If Lyman should accept this opportunity,the company's after tax profits would increase by:

Question

Quizplus · Accepted Answer

The increase in sales is $100,000. The cost of sales (manufacturing and selling expenses) is 70% of $100,000, which is $70,000. The collection expenses are 15% of $100,000, which is $15,000. The total expenses are $70,000 + $15,000 = $85,000. The profit before tax is $100,000 - $85,000 = $15,000. The after-tax profit is $15,000 * (1 - 0.40) = $9,000.

Lyman Company Has the Opportunity to Increase Annual Credit Sales