ABC reports the following information:

Selling price per unit P70

Variable cost per unit P45

Fixed cost per unit P15

Annual credit sales 400,000 units

Collection period 4 months

Rate of return 19%

The company is considering easing its credit standards. If it does, the following is expected to result:

Sales will increase by 50 percent;

Collection period will increase to 6 months;

Bad debt losses are anticipated to be 8 percent on the incremental sales;

Collection costs will increase by P100,000.

a) Should the proposed relaxation in credit standards be implemented?

b) Suppose the company is operating at full capacity and because of the increase in sales due to the relaxed credit policy, the company will have to invest in additional equipment, which would increase the fixed cost per unit by P20. Should the proposed relaxation in credit standards be implemented?