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 21% tax bracket. What is the profit on new sales?
A) $8,532
B) $9,660
C) $7,245
D) $10,710

Question

Quizplus · Accepted Answer

First, calculate the net sales after accounting for the uncollectible 5%: $90,000 - (5% of $90,000) = $90,000 - $4,500 = $85,500. Next, subtract the collection cost, which is 3% of the original sales: 3% of $90,000 = $2,700. So, the amount after collection costs is $85,500 - $2,700 = $82,800. The cost of producing and selling is 80% of the original sales, which is $90,000 * 80% = $72,000. Subtract this from the amount after collection costs to get the gross profit: $82,800 - $72,000 = $10,800. Finally, calculate the net profit after taxes by subtracting 21% of the gross profit for taxes: $10,800 - (21% of $10,800) = $10,800 - $2,268 = $8,532.