Relaxation of credit standards
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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, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year; the average collection period is expected to increase from 45 to 60 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm's required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.)
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This provide the steps to compute the impact of Relaxation of credit standards
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1) Increase in Contribution= Sales-Variable costs=( 40-31)*11000 $9,000.00
2) Less Incremental Bad debts= $9,200.00 ( 3% of 11000*40- 1% of 10000*40)
Earnings before taxes ...
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