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% (production-related costs are 82% of revenue).

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 expenses of $150,000 per year?