Problem:
Jim Khana, the credit manager of Velcro Saddles, is reappraising the company’s credit policy. Velcro sells on term of net 30. Cost of goods sold is 85% of sales and fixed costs are a further 5% of sales.
Velcro classifies customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:
| Classification |
|
Defaults as Percent of Sales |
|
Average Collection Period in Days
for nondefaulting accounts |
| 1 |
|
|
0 |
|
|
|
45 |
|
| 2 |
|
|
2 |
|
|
|
42 |
|
| 3 |
|
|
10 |
|
|
|
40 |
|
| 4 |
|
|
20 |
|
|
|
80 |
|
The average interest rate was 15%?
What conclusions (if any) can you draw about Velcro's credit policy? What other factors should be taken into account before changing the policy?