Question

4.3 Red Stores is considering extending credit to some customers who may be at risk of defaulting in payment. Sales will increase by R500 000 if credit is granted to these customers. From the new
accounts receivable generated, 10% is expected to be uncollectable. Additional collection costs will be 4% of sales, and the production and selling costs will be 60% of sales. The company is subject to tax at 28%.

4.3.1 Calculate the incremental profit/loss after tax.
4.3.2 Determine the incremental return on sales if these new customers are accepted.
4.3.3 Briefly explain any 4 methods to collect overdue accounts

Answer 1

4.3.1

Calculation of Incremental Profit after tax

Increased Credit Sales	5,00,000.00
Production & Selling Costs (60% of Sales)	3,00,000.00
Expected Uncollectibles (10% of Sales)	50,000.00
Additional Collection costs ( 4% of Sales)	20,000.00
Profit Before Tax	1,30,000.00
Tax @ 28%	36,400.00
Profit After Tax/ Incremental Profit	93,600.00

4.3.2

Incremental Return on Sales

=> 93,600/500000*100

=> 19%

4.3.3

Methods to collect overdue accounts.

• Friendly payment reminder
• Overdue payment reminder
• Final notice
• Direct contact
• Formal letter of demand