Maxwell Corp. distributes the "Smart" brand of electronic controller systems. The company currently has a credit policy of 1/10, net 40, though on average only 20% of customers pay in 10 days and take the discount, while another 30% pay on average in 15 days yet still take the unearned discount. The company's remaining customers pay on average in 50 days. Bad debt losses are 3% of sales. The company's sales are currently $600,000 per month, all on credit. Maxwell is thinking of restructuring its credit and collections department, with the goal of eliminating all unearned discounts and reducing bad debt losses to 1.5%. With this new policy, the company believes that sales will fall by 5%, that 40% of customers will pay in 10 days and obtain the discount, and that the remaining customers will pay in 40 days. If Maxwell's variable costs are 60% of sales, its monthly collections department expense is expected to rise by $6,000 to $20,000, and its opportunity cost on funds is 12%. Maxwell's tax rate is 30%.
a. Should the company implement the new policy?
b. What is the maximum percentage sales decline that the company could take and still proceed with the new policy?