Parkison Company can increase annual sales by $150,000 if it sells to a new, riskier group of customers. The uncollectible accounts expense is expected to be 16% of sales, and collection costs will be 4 . The company’s manufacturing and selling expenses are 75 of sales, and its effective tax rate is 38%. If Parkison accepts this opportunity, its after-tax income will increase by

Answer (B) is correct. The company’s manufacturing and selling costs exclusive of bad debts equal 75 of sales. Hence, the gross profit on the $150,000 increase in sales will be $37,500 ($150,000 × 25%). The increase in after-tax profit is calculated as follows: Increase in gross profit $37,500 Less: uncollectible accounts ($150,000 × 16%) (24,000 Less: collection costs ($150,000 × 4%) (6,000)
Increase in pre-tax income $ 7,500 Less: income tax expense ($7,500 × 38%) (2,850)
Increase in after-tax income $ 4,650