4. Evaluation of a proposed change in credit customers Making changes to a firm's credit policy involves trade-offs. Assume that all other factors remain constant and that a firm modifies its credit standards to make them more conservative to exclude a group of credit customers. Under these circumstances, it is reasonable to expect the following changes: 1. The firm's volume of credit sales will 2. The average creditworthiness of the firm's credit customers will 3. The firm's bad-debt expenses will 4. The firm's collection costs will Consider the case of Midwest Furniture Designs (MFD): Midwest Furniture Designs (MFD), a wholesaler of home furniture products made with farm-raised exotic woods, currently sells on terms of 4/10 net 30 to its regional customers. These are customers located within 500 miles of its corporate headquarters in Columbus, Ohio. It has current credit sales of $4,500,000, and under a new growth initiative it is considering expanding the geographic span of its market by offering the same credit terms to customers beyond its current 500-mile limit. The assumptions made in the course of the analysis include the following: MFD expects to generate additional sales equal to 15% of its existing credit sales. The average collection period (ACP) will be 65 days, and the bad-debt loss ratio will be 4%. Approximately 25% of the new customers will take advantage of the cash discount. To satisfy the additional demand for product, additional inventory equal to 5% of sales will be required. The variable cost ratio is, and is expected to remain, equal to 60% of sales. The firm can earn a return of 12% on its current asset investments. The creditworthiness of the new credit customers will be the same as that of the firm's existing credit customers. Based on this data, complete the following table: Analysis A. Marginal profitability of the additional gross sales B. Additional investment in accounts receivable C. Opportunity cost of investment in accounts receivable D. Additional cost of bad-debt losses $27,000 E. Additional investment in inventories $33,750 F. Net benefit associated with the change in policy Should MFD make the proposed change? Why or why not? Yes, because the net benefit of the proposal is negative. No, because the net benefit of the proposal is equal to or greater than $0. Yes, because the net benefit of the proposal is equal to or greater than $0. O No, because the net benefit of the proposal is negative.