Tom's Toys is currently experiencing a bad debt ratio of 6%.Tom is convinced that,with tighter credit controls,he can reduce this ratio to 2%; however,he expects sales to drop by 8% as a result.The cost of goods sold is 75% of the selling price.Per $100 of current sales,what is Tom's expected profit under the proposed credit standards?

Question

Quizplus · Accepted Answer

Under the current situation, for every $100 of sales, the cost of goods sold is $75, and the bad debt is $6, leaving a profit of $19. With the proposed credit standards, sales drop to $92, cost of goods sold is $69 (75% of $92), and bad debt is $1.84 (2% of $92), leaving a profit of $21.16, rounded to $21.20.

Tom's Toys Is Currently Experiencing a Bad Debt Ratio of 6%.Tom