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Net profit(cost) of the relaxation of credit standard

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Company XYZ is going to relax its credit standards. The proposal will increase sales by 20% from 10 million. The average collection period is expected to increase from 35 to 50 days and bad debts are expected to increase from 2% of sales to 7%. The firms variable cost =60% of sales and fixed cost total 2.5 million per year. The opportunity cost is 16%. Assume a 365 day year. Determine net profit(cost) of the proposed relaxation of credit standard.

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This solution helps in determining the net profit(cost) of the proposed relaxation of credit standard.

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