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

Question

Quizplus · Accepted Answer

The current profit is $20 ($100 sales - $80 COGS). With a 10% sales increase, sales become $110, and COGS is $88, leaving $22 profit. With an 8% bad debt, $8.80 is lost, leaving $13.20 profit.

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