Johnston Enterprises is reexamining its current credit policybasically, Johnston insists on cash payment at the time of sale. It is felt that sales are being lost to competitors as a result of a credit policy that is too restrictive. The sales manager is advocating a new credit policy and has generated the following information:

a. Annual sales are now $1,000,000. If the proposed credit policy is implemented, annual sales will increase to $1,300,000.

b. Estimates of the expected payment pattern of customers indicate that the average accounts receivable balance will be $112,000.

c. Bad debts are expected be around $26,000 per year.

d. One full-time person will be required to manage the accounts. Annual salary and fringe benefits for this person will total $50,000.

e. Cost of goods sold is equal to 70 percent of sales.

f. The interest rate on short-term loans is 10 percent.

By how much will the net income of Johnston Enterprises CHANGE if the new credit policy is adopted?

DECREASE in Net Income of $6,100.

INCREASE in Net Income of $2,800.

INCREASE in Net Income of $9,200.

DECREASE in Net Income of $3,300.

INCREASE in Net Income of $5,700.