Chapter 15, Problem 15.4WUE

Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a per-unit sale price of $30. Bad debts currently are 5% of sales. The firm estimates that a proposed relaxation of credit standards would not affect its 7Q-day average collection period but would increase bad debts to 7.5% of sales, which would rise to 300,000 units per year. Forrester requires a 12% return on investments. Show all necessary calculations needed to evaluate Forrester’s proposed relaxation of credit standards.