Terry's Place is currently experiencing a bad debt ratio of 4 percent. Terry is convinced that, with looser credit controls, this ratio will increase to 8 percent; however, she expects sales to increase by 10 percent as a result. The cost of goods sold is 80 percent of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?
A)$26
B)$15.40
C)$13.20
D)$25.60

Question

Quizplus · Accepted Answer

Under the proposed credit standards, for every $100 of current sales, the expected increase in sales is 10%, making it $110 in sales. With a bad debt ratio of 8%, the actual sales expected to contribute to profit is 92% of $110, which is $101.20. The cost of goods sold is 80% of the selling price, so the cost for $101.20 is 80% of 101.20 = $80.96. The expected profit is then $101.20 (sales contributing to profit) - $80.96 (cost of goods) = $20.24. However, considering the initial $100 sales, the profit is calculated as follows: 92% of $100 (to account for the bad debt ratio) is $92, and the cost of goods sold is 80% of that, which is $73.60. Therefore, the profit on the initial $100 sales is $92 - $73.60 = $18.40. The total expected profit combining the initial and additional sales under the new credit standards is $18.40 + $20.24 = $38.64. However, this calculation seems to have misunderstood the question's requirement to calculate profit per $100 of current sales under the new standards, not the total profit from both current and additional sales. The correct approach is to calculate the profit directly from the adjusted sales figure considering the bad debt ratio and cost of goods sold. With an 8% bad debt ratio on $110 of sales, the effective sales are $101.20. The cost of goods sold (80%) on the original $100 sales is $80, leaving a gross profit of $20 before adjusting for bad debt. Adjusting for the new bad debt ratio, the effective profit is 92% of $20 (since 8% is lost to bad debts), which is $18.40, not accounting correctly for the increase in sales and bad debt impact. The correct calculation should focus on the impact of the increased bad debt and sales on the profit margin, not combining profits from initial and additional sales. The mistake was in the interpretation of how the bad debt affects overall profitability and the calculation of profit based on the increased sales volume and bad debt ratio. The correct profit calculation under the proposed credit standards should consider the increase in sales, the bad debt impact on these sales, and the cost of goods sold to determine the net profit from the increased sales volume alone. Given the error in the calculation process, let's correct the approach:For every $100 of sales at the current standard:- Sales would increase by 10% to $110.- With an 8% bad debt ratio, 92% of sales would be realized, which is 92% of $110 = $101.20.- The cost of goods sold is 80% of the selling price, so for $101.20, the cost is 80% of $101.20 = $80.96.- Therefore, the expected profit is sales minus the cost of goods sold, which is $101.20 - $80.96 = $20.24.The error in the initial explanation was due to a misunderstanding of the question's requirements and a miscalculation of the profit under the new credit standards. The correct answer should directly calculate the profit from the increased sales and adjusted for the new bad debt ratio, without incorrectly combining profits from initial and additional sales. The correct profit per $100 of current sales under the proposed credit standards should be recalculated based on the correct understanding of the question's requirements. Given the mistake in the calculation and explanation, the correct profit calculation should directly address the profit impact of the proposed changes without incorrectly combining or misunderstanding the profit components. The correct answer involves understanding the impact of the increased sales and bad debt ratio on the net profit margin.

Terry's Place Is Currently Experiencing a Bad Debt Ratio of 4