Rentz Distributors Inc. currently sells on terms 1/10, net 30, with bad debt losses at 1 percent of gross sales. Of the 99 percent (by dollar value) of the customers who pay, 50 percent take the discount and pay on Day 10, while the remaining 50 percent pay on Day 30.

The firms gross sales are currently $2,000,000 per year, with variable costs amounting to 75 percent of sales. The firm finances its receivables with a 10 percent line of credit, and there are sufficient fixed assets to support a doubling of sales.

Rentzs credit manager has proposed that credit terms be changed to 2/10, net 40. he estimates that these terms would boost sales to $2,500,000 per year. However bad debt losses would double to 2 percent of new sales level. It expects that 50 percent of the paying customers will continue to take the discount and pay on Day 10, while 50 percent will pay on Day 40.

Should Rentz initiate the proposed policy? Support your decision with the required calculations.