Explain the following tables and discuss about policy "A" and policy "B" in collection program? Justify which policy suits to the firm and why? Collection Programs Default Risk and Bad-Debt Losses Present Policy $2,400,000 2% Demand Incremental sales Default losses Original sales Incremental Sales Avg. Collection Pd. Original sales Incremental Sales 2 months 3 months Default Risk and Bad-Debt Losses 1 month Policy A Policy B $3,000,000 $3,300,000 $ 600,000 $ 300,000 1. Additional sales 2. Profitability: (20% contribution) x (1) 3. Add. bad-debt losses: (1) x (bad-debt %) 4. Add. receivables: (1) / (New Rec. Turns) 5. Inv. in add. receivables: (.80) x (4) 6. Required before-tax return on additional investment: (5) x (20%) 7. Additional bad-debt losses + additional required return: (3) + (6) 8. Incremental profitability: (2)-(7) 10% Policy A $600,000 120,000 60,000 100,000 80,000 16,000 76,000 44,000 18% Policy B $300,000 60,000 54,000 75,000 60,000 12,000 66,000 (6,000)