Question

Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. Five percent will be uncollectible. The collection cost on all accounts is 3% of new sales, the cost of producing and selling is 80% of sales, and the firm is in the 30% tax bracket. What is the profit on new sales

Answer 1

Answer: $7,560

Explanation:

Before tax Profit = Net sales - Cost of production

Net sales = Sales collected - Cost of collection

= (90,000 * (1 - 5%)) - (90,000 * 3%)

= $82,800

Cost of production = 80% * 90,000

= $72,000

Before tax profit = 82,800 - 72,000

= $10,800

After tax profit = 10,800 * ( 1 - 30%)

= $7,560