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Janeen's Horse Supply is considering a more stringent credit

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Scenario:

Janeen's Horse Supply is considering a more stringent credit policy. Currently 6% of annual sales are written off for bad debt. It has been estimated if the credit standards are raised, the annual sales will decrease by 5%; however, the bad debt will decrease to 4% of total sales. The profit margin on sales is 20% (not including bad debt).

Should the new policy be enacted?

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Solution Summary

This problem will help students to evaluate the alternative credit policies for better profitability and receivables management. It presents calculations in simple steps.

Solution Preview

Assume that the current level of sales is 100.
Current profits (excluding Bad debts)= 20%*100=20
Bad debt = 6%*100=6
Net ...

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