In an attempt to boost sales, BB is considering relaxing its credit standards by extending more credit
Question:
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?
Step by Step Answer:
Principles of Managerial Finance
ISBN: 978-1408271582
Arab World Edition
Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix