● RST Limited is considering relaxing its present credit policy and is in the process of evaluating two proposed policies. Currently, the firm has annual credit sales of `225 lakhs and accounts receivable turnover ratio of five times a year. The current level of loss due to bad debts is `7,50,000. The firm is required to give a return of 20% on the investment in new accounts receivables. The company’s variable costs are 60% of the selling price. Given the following information, which is better option?

(Amount in `lakh)

Present policy Policy Option I Policy Option II Annual credit sales (`) 225 275 350 Accounts receivables-Turnover ratio 5 4 3 Bad debt losses (`) 7.5 22.5 47.5