King Ltd has been looking into ways to increase sales. The CEO is proposing that the company offer more attractive credit terms of 3/10 net 60. The positive effect of these new credit terms would be a projected increase in sales to $4.2 million with 60% of customers taking the discount. The negative effect would be an increase in the average collection period to 35 days and an increase in bad debts to 2.5% of sales. 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%. Currently the companys credit terms are 2/10, net 30. The average collection period is 20 days, with 80% of sales currently taking the discount. If the current credit terms are continued, next years sales are projected to be $3.1 million. All sales are on credit, and bad debts are expected to be 1.5% of credit sales.

Required: Advise the company whether or not it should change its credit policy. Show all calculatons. (16 marks)