Question
5. Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 7200 rugs per year at an
5. Regency Rug Repair Company is trying to decide whether it should relax its credit standards.
The firm repairs 7200 rugs per year at an average price of $76 each. Bad-debt expenses are 1%
of sales, the average collection period is 40 days and the variable cost per unit is $42. Regency
expects that if it does relax its credit standards, the average collection period will increase to 48
days and that bad debts will increase to 1 percent of sales. Sales will increase by 400 repairs
per year. If the firm has a required rate of return on equal-risk investments of 14%, what
recommendations would you give the firm? Use your analysis to justify your answer and show
your workings. (Note: Use a 365-day year.)
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