Fishoeder Realty, Inc. refuses to extend credit to any wholesale distributors
who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $6 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 140 days and that the bad-debt loss ratio would be 15%. The firm's variable cost ratio is 0.55, making its profit contribution ratio 0.45. Fishoeder Realty would invest an additional $2 million in inventory. Fishoeder Realty' required pretax return (i.e., opportunity cost) on receivables and inventory investments is 17.5%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine the net effect on Fishoeder Realty' pretax profits of extending credit to these (previously delinquent) customers. Should the firm proceed with the credit extension?
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