As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio,...

As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 7.0%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 5.0%. Assume current sales are $100.

Expected Profit?

If the cost of goods sold is 70% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected Profit?

Expert Solution

Formula		Current policy	Proposed policy
Sales reduce by 5% under proposed policy	Sales	100.00	95.00
7%*Sales; 5% of Sales	Less: bad debts	7.00	4.75
70%*Sales	Less: COGS	70.00	66.50
(Sales-bad debts-COGS)	Profit	23.00	23.75

Expected profit under current policy = $23

Expected profit under proposed policy = $23.75

jeff jeffy answered 1 year ago

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