Spencer Inc. presently sells to customers on terms of 2/10, net 30. The average collection period is 30 days, with 85% of sales currently taking the discount. Next years sales are projected to be $5 million, and all sales are on credit. Bad debts are 3% of credit sales.

In order to increase sales, the Marketing Department has proposed that the company should offer more attractive credit terms of 3/10 net 60. With these new terms sales are projected to increase to $6 million with 90% of customers taking the discount and the average collection period increasing to 40 days. It is expected that the companys contribution margin of 10% would hold with the expansion of sales, as would its short-term financing cost of 8%. Bad debts however are expected to increase to 4% of credit sales.

Required: Advise Spencer Inc. whether or not it should change its credit policy as recommended by its Marketing Department.

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