Question
Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation,
Relaxation of credit standardsLewis 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
14,000
to
16,100
units during the coming year; the average collection period is expected to increase from
35
to
55
days; and bad debts are expected to increase from
3%
to
5%
of sales. The sale price per unit is
$36,
and the variable cost per unit is
$24.
The firm's required return on equal-risk investments is
10.9%.
Evaluate the proposed relaxation, and make a recommendation to the firm.
(Note:
Assume a 365-day year.)
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