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.)