Question

based in Quebec, Les Dents Bleu is a well-known and reputable manufacturer of Bluetooth circuit boards for telecommunications devices. The company is looking to expand its sales to the personal speaker market. While the firm expects an extra $1,800,000 in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. on addition, collection costs will be 2% an all new sales. The firms production costs are 65% of sales. Selling expenses are 12% of sales and that have an opportunity cost of funds (before tax) of 15%. They can turn receivables five times per year. Should they enter the personal speaker market?

Answer 1

Accounts receivable turnover ratio = Sales / Accounts Receivable

5 = 1,800,000/ Accounts Receivable

Accounts Receivable = 360,000

Sales	1,800,000
Less: Production costs [1,800,000*65%]	1170000
Gross Margin	630,000
Less:Selling expenses [1,800,000 *12%]	216000
Uncollectible Sales [1,800,000 * 15%]	270000
Collection costs [1,800,000 *2%]	36000
Net Income	108,000

Return on investment = 108,000 / 360,000 = 30%

Since the return on investment(before tax) is higher than the opportunity cost (before tax) it should enter the personal speaker market.