The TNC Corporation is in the volatile gaming business. The firm has annual revenues of $300 million and operates with a 40% gross margin on sales. Bad debt losses average 4% of revenues. TNC is contemplating an easing of its credit policy in an attempt to increase sales. The loosening would involve accepting a lower-quality customer for credit sales. It is estimated that sales could be increased by $50 million a year. An increase in inventory investment of $3,000,000 will be required. Opportunity costs for inventory is 12%; however, the collections department estimates that bad debt losses on the new business would run five times the normal level, and that internal collection efforts would cost an additional $2 million a year.

Show computations to explain if the change in policy should be made.

Answer rating: 100% (QA)

The new credit policy should be accepted if the benefits from addition... View the full answer