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.

a. Should the firm change its credit policy?

b. Would your answer to (a) change if 5 percent of all customers will
fail to pay their bills under the new credit policy?

c. 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.

a  No  There are several other factors that may make this look
unattractve besides the tiny increase in sales.  You will need to
retrain your staff to deal with 30 days same as cash. One of your
otherwise most valuable employees may be unable to make the transition
without lots of errors.
 Those who continue to be cash customers will be suspicious that the
next price increase is to subsidise those getting credit. It will take
time to convince them otherwise and time is money. You may not
convince them before they find another sourse.
 It will take longer to do credit transactions than cash. Especially
the first month.  Your cash customers will resent having to wait
longer to be served. You can reduce this problem by hiring 2 more
employees, who MAY help you get though the transition, but the cost of
two more employees long term will not be made up by the increased
sales. Your long term employees will realize you are over staffed and
start looking for other employment. This will cut their average
working efficiency and enthusiasm. You could loose your most valuable
employee to your competion where he/she might lead away some of your
most valued customers.
 c is not a realistic expectation, so it does not change my opinion.
To have no late payments among the existing customers would require
that you refuse most of them credit. That would cause resentment,
especially if you are lenient about bad credit/no credit with the new
customers.
 d giving credit is extremely costly to reverse later. It is better
never to start. Some people concider credit wicked and may find
another supplier or employer.   Neil