Mountain Sports, Inc. is considering new credit policies in an effort to increase its sales. In spite of the fact that relaxing the current standards will surely increase both bad debt losses and the average collection period, the companys financial manager believes that overall profitability could be increased. He has estimated annual credit sales, bad debt losses, and the average collection period on collectable sales for the proposed credit policy outlined below. Variable costs are 75% of sales and the required rate of return is 20%. Which credit policy should Mountain Sports, Inc. adopt?

Present Policy Policy A

Annual credit sales $2,600,000 $3,000,000

Bad debt losses 70,000 90,000

Average collection period:

Old sales 30 days 40 days

New sales 40 days

Investment in inventory $ 50,000 $ 60,000