Jim Khana, the credit manager of Velcro Saddles, is reappraising the company?s credit policy. Velcro sells on terms of net 30. Cost of goods sold is 85% of sales. Velcro classifies customers on a scale of 1 to 4. During the past 5 years, the collection experience for the four groups of customers was as follows:

The average interest rate was 15%. What is the expected profit for each group in Velcro?s credit policy? Should the firm deny credit to any of its customers? Which groups? What other factors should be taken into account before changing this policy?

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Average Collection Defaults as Percentage of Sales Nondefaulting Accounts 45 42 Classlficatlon Classificatlon 2 2 10 50 85 20