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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

Answer (A) is incorrect because The amount of $2,850 is based on a 62% tax rate, the complement of the actual tax rate.
Answer (C) is incorrect because The amount of $7,500 is the pretax income.
Answer (D) is incorrect because The amount of $8,370 omits collection costs from the calculation.