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Incremental Credit Policy

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In order to increase sales from their present annual $35million, ABC Company, a retailer, is considering 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
Increase in sales from previous level (in millions) $5.5 $4.5 $2.3 $1.1
Average Collection period for incremental sales (Days) 45 60 90 150
Bad-debt loses on incremental sales 2% 4% 7% 10%

The prices of its product average $30 per unit, and variable cost average per unit is $25. If the company has a before-tax opportunity cost of 20%, which credit policy should be pursued?

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Solution Summary

Incremental Credit Policy