To increase sales from their present annual $24 million, Kim Chi Company, a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that, with increasingly liberal credit standards, the following will result:

The prices of its products average $20 per unit, and variable costs average $18 per unit. No bad-debt losses are expected. If the company has a pre-tax opportunity cost of funds of 30 percent, which credit policy should be pursued? Why? (Assume a 360-day year.)

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CREDIT POLICY Increase in sales from previous level (in millions) Average collection period for incremental sales (days) $2.8 45 $1.8 60 $1.2 90 $.6 144