Aloa Inc. presently sells to customers on terms of 2/10, net 30. The average collection period is 20 days, with 80% of sales currently taking the discount. Next years sales are projected to be $3.1 million, and all sales are on credit. Bad debts are 1.5% of credit sales.

In order to increase sales, the Marketing Department has proposed that the company should offer more attractive credit terms of 3/10 net 60. With these new terms sales are projected to increase to $4.2 million with 60% of customers taking the discount and the average collection period increasing to 35 days. It is expected that the companys contribution margin of 5.5% would hold with the expansion of sales, as would its short-term financing cost of 6%. Bad debts however are expected to increase to 2.5% of credit sales.

Required: Advise Aloa Inc. whether or not it should change its credit policy as recommended by its Marketing Department. Show all calculations.