Lewis Enterprises is considering relaxing its credit standards to increase its current saggy sales.

| March 31, 2017

Question
Lewis Enterprises is considering relaxing its credit standards to increase its current saggy sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collection period is expected to increase from 45 to 60 days, and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firms required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year).

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