Q5. Global Tools is currently selling a product for $12 per unit. Sales (all on credit) for last year were 50,000 units. The variable cost per unit is $7. The firms total fixed costs are $120,000. The firm is currently contemplating a relaxation of credit standards that is expected to result in the following:

• a 5% increase in unit sales to 52,500 units.
• an increase in the average collection period from 30 days (the current level) to 40 days.
• an increase in bad-debt expenses from 1% of sales (the current level) to 2%.

The firms required return on equal-risk investments, which is the opportunity cost of tying up funds in accounts receivable, is 14%. Evaluate this proposed change and make a recommendation to the firm. (Assume a 360-day year.)