The Bailey machine Tool company thinks it can increase sales by 10 million by loosening its credit standards somewhat. The firm normally experiences bad debts of about 2% of sales, but marketing estimates that the incremental business would be from financially weaker customers who would not pay about 17% of the time. The firm's gross margin is 18%.
a) Should bailey lower its credit standards to get the new business?
b) Would your answer change if taking on the new business also involved incremental collection expense of $150,000 per year.