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Question
(a) Burdekin Products ltd is considering relaxing its credit standards in order to increase sales and profits. The company's current annual credit sales are 24,500 units at a selling price of $35 each. Each sale makes as contribution to profit of $24.
As a result of the relaxed credit standards, it is expected that sales will increase by 8,000 units, bad debts will increase from 3% to 5% of sales, while the average collection period of accounts receivable will increase from 35 days to 60 days. The company's required rate of return on receivables is 15% before tax.
Required: Advise the directions whether the new policy should be adopted.
(b) What forms of credit risk do small businesses face? How can they mitigate these risk?
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