21. Credit policy (S31.3) 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, and fixed costs are a further 5% of sales. Velcro classifies customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:

Classification Defaults as Percent of Sales Average Collection Period in Days for Nondefaulting Accounts 1 0 45 2 2.0 42 3 10.0 40 4 20.0 80 The average interest rate was 15%.

What conclusions (if any) can you draw about Velcro’s credit policy? What other factors should be taken into account before changing this policy?