Regency Rug Repair Company is trying to decide whether
it should relax its credit standards. The firm repairs 72,000 rugs per year at an average
price of $32 each. Bad-debt expenses are 1% of sales, the average collection period
is 40 days, and the variable cost per unit is $28. Regency expects that if it does
relax its credit standards, the average collection period will increase to 48 days and
that bad debts will increase to 11/2% of sales. Sales will increase by 4,000 repairs per
year. If the firm has a required rate of return on equal-risk investments of 14%,
what recommendation would you give the firm? Use your analysis to justify your
answer. (Note: Use a 365-day year.)
