Question
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 15% from 10 comma 000 to 11 comma 500 units during the coming year; the average collection period is expected to increase from 45 to 65 days; and bad debts are expected to increase from 3% to 4.5% of sales. The sale price per unit is $ 38, and the variable cost per unit is $ 28. The firm's required return on equal-risk investments is 25.1%. Evaluate the proposed relaxation, and make a recommendation to the firm.(Note: Assume a 365-day year.)
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