John Company reported the following information for 2021:

Selling price per unit $100

Variable cost per unit $60

Fixed cost per unit $20

Annual credit sales 1,000,000 units

Credit term net 30

Collection period 45 days

Rate of return 8%

Bad debts expense 2% of credit sales

All company sales are in credit.

To boost its sales, the company is considering the following alternatives:

Alternative A: Offer a more liberal credit term at net 45 which will increase the average collection period to 65 days but will increase annual credit sales by 25%. Due to the extension of the credit term, the expected bad debts losses will increase to 4% of the adjusted total credit sales. Additional collection expenses amount to $200,000. Additional fixed cost of $5,000,000 is required to support the higher sales volume.

Alternative B: Allow a 2% discount under a 2/10, net 30 credit policy. Taking into account the percentage of customers availing the discount (40%), the average collection period will decrease to 30 days. The increase in annual credit sales is expected at 10%. Bad debts losses will decrease to 1% of the adjusted total credit sales. Additional collection expenses amount to $300,000. Additional fixed cost necessary amount to $2,000,000.

Which alternative will you recommend, if any?

a. Stick to current

b. Alt A

c. Alt b

How much additional bad debts should the company record under Alternative A?