The Kranberry Kids Klothing Kompany is in the volatile garment business. The firm has annual revenues of $250 million and operates with a 30% gross margin on sales. Bad debt losses average 3% of revenues. Kranberry is contemplating an easing of its credit policy in an attempt to increase sales. The loosening would involve accepting a lower-quality customer for credit sales. It is estimated that sales could be increased by $20 million a year in this manner. However, the collections department estimates that bad debt losses on the new business would run four times the normal level, and that internal collection efforts would cost an additional $1 million a year.

a. Is the policy change a good idea?

b. Is it likely that coupling an increased prompt payment discount with the looser guidelines would reduce the bad debt losses?

c. Is it possible that the idea in part (b) could have a net negative impact? How?