Bluegrass Distilleries, Inc. currently has annual sales of $100 million and an

average collection period of 30 days. It has refused to extend credit to any

wholesale distributors who have a history of being delinquent in repaying credit

extended to them. This policy results in lost sales of $10 million annually. Based

on past experience with these types of customers, the firm estimates that its

average collection period would increase to 45 days and that its bad-debt loss

ratio would increase from 5% to 6%. The firm's variable cost ratio is 0.85.

Bluegrass Distilleries' required pretax return is 20 percent. Is Bluegrass

Distilleries making the correct decision in not granting these customers credit?

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