Q. No 01:

To increase sales from their present annual $ 25 million, Acme Company, may try more liberal credit standards. Currently, the rm has an average collection period of 60 days. It believes that, with increasingly liberal credit standards, the following will result:

CREDIT POLICY

A B C D

Increase in sales from previous level (in millions) $1.5 $1.25 $1 $0.85

Avg. collection period for incremental sales (days) 75 90 144 180

The prices of its products average $50 per unit, and variable costs average $35 per unit. No bad-debt losses are expected. If the company has a pre-tax opportunity cost of funds of 33 percent, which credit policy should be pursued? Why? (Assume a 360-day year.)