Problem
Samsung Inc. is currently selling automatic washing machines for $2500 per unit. Sales (all on credit) for last year were 1000 units. The variable cost per unit is $2300. The firm's total fixed costs are $150,000. The firm is currently contemplating a relaxation of credit standards that is expected to result in the following: a 20% increase in unit sales to 1200 units; an increase in average collection period from 30 days (the current level) to 45 days; an increase in bad-debt expenses from 3% of sales (the current level) to 5%. The firm determines that its cost of tying up funds in receivables is 18% before taxes. To determine whether to relax its credit standards the company must calculate its effect on firm's additional profit contribution from sales, the cost of marginal investment in accounts receivable, and the cost of marginal bad debts. As a finance manager do you think (based on calculations) either company relax its credit standards or not?