East Lansing Appliances $($ELA$)$ expects to have sales this year of $15$million under its current credit policy. The present terms are net $30$; average collection period $($ACP$)$ is $60$ days$)$ and the bad debt loss percentage is $5$ percent. Since ELA wants to improve its

profitability, the treasurer has proposed that the credit period be shortened to $15$ days.This change would reduce expected sales by $500,000$ dollar, but it would also shorten the

ACP on the remaining sales to $30$ days. Expected bad debt losses on the remaining sales would fall to $3$ percent. The variable cost percentage is $60$ percent, and the cost of capital is $15$ percent.

a$.$ What would be the incremental bad debt losses if the change were made?

b$.$ What would be the incremental cost of carrying receivables if this change were made?

c$.$ What are the incremental pre$-$tax profits from this proposal?

Cost of carrying receivables $=$ DSO$($Sales$/$Day$)($Variable cost ratio$)($Cost of funds$)$