I am studying for an upcoming test, and this is one of the practice
questions.  I know there will be something similar to this question on
the test:

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.

nockmdead,
a. Yes,
Currently: 200 (units) by $101 (sales price) equals income $20,200-.
Profit expressed as 200 (units) by $21 (margin) equals $4,200-.
Projected: 220 (units) by $101 (sales price) equals gross income of
$22,220-, less cost of ?terms? (22,220 divided by 100) of $222.20,
equals net income of $21,997.80. Profit expressed as 220 (units) by
$21 (margin) less cost of terms of $222.20 equals $4,397.80.
Net effect:
Income increases by $1,797.80
Profit increases by $197.80 

b. Answer would change,
Gross income of $22,220- has bad debt charge of $1,111- (22,220
divided by 100 multiplied by 5) and cost of terms $222.20 giving net
income of $20,886.80. Profit effected equally and is now $2,866.80.
Compare to current ?only cash? system:
Current income of $20,200- against expected income of $20,886.80 means
a sales decrease of $686.80.
Current profit of $4,200- against expected profit of $2,866.80 means a
profit decrease of $1,333.20.

c. Answer would change,
Gross income of $22,220- has bad debt charge of  $101- (projected
income $22,220- less current income $20,200- divided by 100 multiplied
by 5) and cost of terms $220.20 giving net income of $21,898.80.
Profit effected equally and is now $4,296.80.
Compare to current ?only cash? system:
Current income of $20,200- against expected income of $21,898.80 means
a sales increase of $1,698.80
Current profit of $4,200- against expected profit of $4,296.80 means
an increase of $96.80.

The answers (as shown above) painfully describe (in dollar and cents)
the effects of the proposed change in the firms credit policy. However
it needs to be realised that to correctly answer the question, comment
may be required (depending on the level of the test you are taking) on
factors just below the surface of the question at hand.

For example:
If this change went ahead what effects administratively will there be?
Are the firms employees (who now trade their product/service for cash)
going to be spending more time chasing up trade creditors?
Has this added cost been factored into our cost analysis?

Kind regards,
gfmaster

gfmaster, 

Wow!  Very indepth answer; I can see how you arrived at the
conclusions. You brought up a very good point about the administrative
changes that would take place, which would be subject to a
cost-benefit analysis.