The Marketing Manager of Creative Toys Ltd has been looking at ways to increase sales. He is proposing that the company should offer more attractive credit terms of 3/10 net 60. The positive effect to these new terms would be a projected increase in sales to $6 million with 90% of customers taking the discount. The negative effect would be an increase in the average collection period to 40 days and an increase in bad debts to 4% of sales. 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%.

Currently, Creative Toys Ltd.s credit terms are 2/10, net 30. The average collection period is 30 days, with 85% of sales currently taking the discount. If the current credit terms are continued next years sales are projected to be $5 million. All sales are on credit and bad debts are expected to be 3% of credit sales.

Required: Advise Creative Toys Ltd. whether or not it should change its credit policy as recommended by the Marketing Manager. Show all calculations. (16 marks)