Chapter 15, Problem 15.3STP

Learning Goal 4

ST15- 3 Relaxing credit standards Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and the variable cost per unit is $28. Regency expects that if it does relax its credit standards, the average collection period will increase to 48 days and that bad debts will increase to 1 ½ % of sales. Sales will increase by 4,000 repairs per year. If the firm has a required rate of return on equal-risk investments of 7%, what recommendation would you give the firm? Use your analysis to justify your answer. (Note: Use a 365-day year.)