Jeans Manufacturing thinks that it can reduce its high credit costs by tightening its credit standards. However, as a result of the planned tightening, the firm believes its annual sales will drop from $38 million to $36 million. On the positive side, the firm expects its average collection period to fall from 58 to 45 days and its bad debts to drop from 2.5 to 1% of sales. The firm’s variable cost per unit is 70% at its sale price, and its required return on investment is 15%. Assume a 365-day year. Evaluate the proposed tightening of credit standards, and make a recommendation to the management of Jeans Manufacturing.
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