Jim Khana, the credit manager of Velcro Saddles, is reappraising the company?s credit policy. Velcro sells on terms of net 30. Cost of goods sold is 85 percent of sales, and fixed costs are a further 5 percent of sales. Velcro classifies customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:

The average interest rate was 15 percent. What conclusions (if any) can you draw about Velcro?s credit policy? What other factors should be taken into account before changing this policy?

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Defaults as Percent of Sales Average Collection Period in Days for Nondefaulting Accounts Classification .0 45 2 2.0 3 4 10.0 20.0 42 40 80