P&K Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills US$450,000 for sales and has US$345,000 in variable costs. The change in credit terms is expected to increase sales to US$510,000. Bad debt expenses will increase from 1 percent to 1.5 percent of sales. The firm has a required rate of return on equal risk investments of 20 percent.

a. What additional profit contribution from sales will be realized from the proposed change?

b. What is the cost of the marginal investment in accounts receivable?

c. What is the cost of the marginal bad debts?

d. Do you recommend this change in credit terms? Why or why not?