To
increase sales from their present annual $24 million, Kim Chi
Company, a wholesaler, may try more liberal credit standards.
Currently, the firm has an average collection period of 30 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) |
$2.8 | $1.8 | $1.2 | $.6 |
|
Average collection period for incremental sales (days) |
45 | 60 | 90 | 144 |
The
prices of its products average $20 per unit, and variable costs
average $18 per unit. No bad-debt losses are expected. If the company
has a pre-tax opportunity cost of funds of 30 percent, which credit
policy should be pursued? Why? (Assume a 360-day year.
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