The Company is considering a change in it’s credit standards. The company sells currently 10 000 units of Technotron. The sales price is 20€. The variable cost is 60% of the sales price. The relaxation of the credit standards should result in 15% sales increase. However, the average credit collection period increases to 80 days from current 30 days. It is also expected that bad debt loss would also increase from 2% to 5% of the sales. The company finances its current assets with short-term loans that carry 10% of interest.

a) Try to evaluate if a change in credit standards has a positive effect on the profits of the company or not. In order to do so, you will have to compare additional profits with increase in bad debt expense and financing costs of additional receivables.

b) Discuss, what are the positive and negative aspects of relaxation of credit standards (in general).