Problem

Futon Company has been reviewing its credit policies. The credit standards it has been applying have resulted in annual credit sales of $5 million. Its average collection period is 30 days, with a bad debt/loss ratio of 1 percent. Futon is considering a reduction in its credit standards. As a result, it expects incremental credit sales of $400,000, on which the average collection period (ACP) would be 60 days and on which the bad debt/loss (BDL) ratio would be 3 percent. The variable cost ratio (VCR) to sales for Futon is 70 percent. The required return on investment in receivables is 15 percent. Evaluate the relaxation in credit standards that Futon is considering. (Use 0.04 percent per 365 days/year.)