Pa Bell, Inc., wants to increase its credit standards. They expect sales will fall by $50,000 and bad-debt expense will fall by 10 percent of this amount. The firm has a 15 percent profit margin on its sales. The tougher credit standards will lower the firm’s average receivables balance by $10,000 and the average inventory balance by $8,000. The cost of financing current assets is estimated to be 12 percent. Should Pa Bell adopt the tighter credit standards? Why or why not?
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