In an attempt to boost sales, BB is considering relaxing its credit standards by extending more credit

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In an attempt to boost sales, BB is considering relaxing its credit standards by extending more credit to small firms. BB charges $1.50 per unit. Variable costs are $0.5126 per unit and fixed cost are $10,000,000 per year. The relaxation of credit standards is expected to result in a 3.8% increase in sales (the firm has sufficient excess capacity to handle the increase) as well as an increase of three days in the average collection period. They also expect bad debt to rise from the current level of 0% to 0.5% of sale. Assuming the BB requires a 13% return on investments of this type, should the firm relax its credit standards?

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Principles of Managerial Finance

ISBN: 978-1408271582

Arab World Edition

Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix

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