The optimal credit policy minimizes the total cost of granting credit. Firms sho
ID: 2690795 • Letter: T
Question
The optimal credit policy minimizes the total cost of granting credit. Firms should avoid offering credit at all cost. An increase in a firm's average collection period generally indicates that an increased number of customers are taking advantage of the cash discount. The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit. Capacity refers to the ability of a firm to meet its credit obligations out its operating cash flows. The optimal credit policy is the policy that produces the largest amount of sales for a firm.Explanation / Answer
The answer:
- The optimal credit policy minimizes the total cost of granting credit.
- The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.
- Capacity refers to the ability of a firm to meet its credit obligations out its operating cash flows.