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?
Assume that the current level of sales is 100.
Current profits (excluding Bad debts)= 20%*100=20
Bad debt = 6%*100=6
This problem will help students to evaluate the alternative credit policies for better profitability and receivables management. It presents calculations in simple steps.