Problem:
Jimmy Jack, Inc. is considering relaxing its credit standards in order to meet a competitor's change in credit policy. As a result of the proposed change, sales during the coming year are expected to increase 15%, from 5,000 cars to 5,750 cars, the average collection period is expected to increase from 35 days to 45 days, and bad debts are expected to increase from 2% to 3%. The average sale price per unit is $1,000 and the variable cost per unit is $850. The firm's required return on investment is 10%.
Evaluate the proposed change in credit standards and make a recommendation to the business. Show all work.