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Credit Policies and Change in Profits for a Company

Our company has annual credit sales of $50 million. Bad debts are 3% of sales. Contribution margin on its sales is 30%.

After my analysis, the following information about my proposed new credit policy to tighten credit policy from the current terms net 1/30 net 50 to net 30 is shown as follows:
- Sales will decrease to $45 million.
- Bad debts will decrease to 1%.

How can I estimate the change in profit for the company after launching the new credit policy ?

Solution Preview

Our company has annual credit sales of $50 million. Bad debts are 3% of sales. Contribution margin on its sales is 30%.

in mn$
Contribution Margin ( in value)= 30% of Credit sales= 15
Less Bad Debts (3% ...

Solution Summary

Our company has annual credit sales of $50 million. Bad debts are 3% of sales. Contribution margin on its sales is 30%.

$2.19