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Credit Policy: Should a More Stringent Policy Be Adopted?

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As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6 percent. He believes that imposing a more stringent credit policy might reduce sales by 5 percent and reduce the bad debt ratio to 4 percent.

If the cost of goods sold is 80 percent of the selling price, should Mr. Procrustes adopt the more stringent policy?

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Solution Summary

This solution discusses in 135 words why the policy with the higher net profit should be adopted.

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If one bed has a selling price of $100. This means that Universal Bed Corp would have a gross profit of $20 on that one bed. Let's say in a given month he sells 10 beds. ...

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