The Boca Grande Company expects to have sales of $10 millions this year under its current operating policies. Its variable costs ratio is 80%, and its cost of short term funds is 16%. Currently Boca Grande's credit policy is net 25 (no discount for early payment), but its customers pay on average in 30 days. Boca Grande spends $50,000 per year to collect its credit accounts. It collect all receivables (no bad debts), and its marginal tax rate is 40%. All costs associated with the manufacturer of the product and with the credit department's operations are paid when the product is sold.

The credit manager is considering two alternative proposals for changing Boca Grande's credit policy. Should a change in credit policy be made?

Proposal 1: Lengthen the credit period by going from net 25 to net 30. collection expenditures will remain constant. Under this proposals sales are expected to increase by 1 million annually, and the DSO is expected to increase from 30 to 45 days on all sales.

Proposal 2: Shorten the credit period by going from net 25 to 20. again collection expenses will remain constant. But sales are expected to decrease by 1 million per year, and the DSO is expected to decline from 30 to 22 days.