Task: Credit Policy.
A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 200 to 220 units per month. The price per unit is $101 and the cost (in present value terms) is $80. The interest rate is 1 percent per month.
1. Should the firm change its credit policy?
2. Would your answer to (a) change if 5 percent of all customers will fail to pay their bills under the new credit policy?
3. What if 5 percent of only the new customers fail to pay their bills? The current customers take advantage of the 30 days of free credit but remain safe credit risks.