A Firm Is Considering Relaxing Credit Standards Which Will Result

question 292

Multiple Choice

A firm is considering relaxing credit standards which will result in an increase in annual sales from $3 million to $3.75 million, a decrease in the cost of annual sales from $2,225,000 to $2,000,000, an increase in additional profit contribution from sales of $10,000, and an increase in the average collection period of 15 days, from 20 to 35 days. The bad debt loss is expected to increase from 1 percent to 1.5 percent of sales. The firm's required return on investments is 15 percent. The net result of the firm relaxing its credit standards is ________. (Assume a 360-day year.)

• A) $10,000
• B) -$16,250
• C) -$26,875
• D) -$16,875

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Definitions:

Growth Strategy

A growth strategy is a plan of action designed to increase the size and scope of a business, by expanding its market reach, product portfolio, or operations.

Market Penetration

A measure of the extent to which a product or service is recognized and purchased by customers within a specific market.

Product Development

The creation of new or improved products or services to meet market demands, involving design, development, and marketing stages.

Strategic Decision

A significant choice made by top management that influences the direction and performance of an organization.