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3. In order to increase sales from their present annual $35 million, ABC Company, a retailer,...

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Finance

3. In order to increase sales from their present annual $35million, ABC Company, a retailer, is considering more liberalcredit standards. Currently, the firm has an average collectionperiod of 30 days. It believes that with increasingly liberalcredit standards, the following will result:
Credit Policy
A   B C D
Increase in sales from previous level (in millions) $6.2 $4.6 $2.6$1.2
Average collection period for incremental sales (days) 45 60 90150
Bad-debt losses on incremental sales 2% 3% 5% 8%
The prices of its products average $30 per unit, and variable costsaverage $26 per unit. If the company has a before-tax opportunitycost of 20%, which credit policy should be pursued?

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4.2 Ratings (643 Votes)
AnswerCredit policy A should be pursuedNet Incremental    See Answer
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3. In order to increase sales from their present annual $35million, ABC Company, a retailer, is considering more liberalcredit standards. Currently, the firm has an average collectionperiod of 30 days. It believes that with increasingly liberalcredit standards, the following will result:Credit PolicyA   B C DIncrease in sales from previous level (in millions) $6.2 $4.6 $2.6$1.2Average collection period for incremental sales (days) 45 60 90150Bad-debt losses on incremental sales 2% 3% 5% 8%The prices of its products average $30 per unit, and variable costsaverage $26 per unit. If the company has a before-tax opportunitycost of 20%, which credit policy should be pursued?

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