Note- please solve this problem step by step to avoid any confusion. Write clear formulae.

The present sales of ABC ltd is Rs 50,00,000. The company classifies its customers under three credit categories A,B and C. The company extends unlimited credit to category A, limited credit to category B, and no credit to category C. As a result of this credit policy the company is foregoing sales to the extent of 5,00,000 to customers in category B and Rs 10,00,000 to customers in category C.

The company is considering the adoption of a more liberal credit policy according to which category B customers will be provided with unlimited credit and customers in category C will be provided with limited credit.

Such relaxation would increase the sales by Rs 10,00,000 on which bad debt will be 8%. The contribution margin ratio is 15%. Average collection period is 60 days. Cost of capital is 21%.

What will be the effect of relaxation of credit policy on the gross profit of the company?