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Galenic Inc. is a wholesaler for a range of phamaceutical products. Before deducting any losses from bad debts, Galenic operates on a profit margin of 6%. For a long time the firm has employed a numerical credit-scoring system based on a small number of key ratios. This has resulted in a bad debt ratio of 1.00%. Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 6 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit-scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates: Number of Accounts Paying 9,090 Credit Score under Proposed System Defaulting Total 9,160 Better than 80 70 Worse than 80 30 810 840 Total 100 9,900 10,000

Galenic Inc. is a wholesaler for a range of phamaceutical products. Before deducting any losses from bad debts, Galenic operates on a profit margin of 6%. For a long time the firm has employed a numerical credit-scoring system based on a small number of key ratios. This has resulted in a bad debt ratio of 1.00%. Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 6 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit-scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates: Number of Accounts Paying 9,090 Credit Score under Proposed System Defaulting Total 9,160 Better than 80 70 Worse than 80 30 810 840 Total 100 9,900 10,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Galenic Inc. is a wholesaler for a range of phamaceutical products. Before deducting any losses from bad debts, Galenic operates on a profit margin of 6%. For a long time the firm has employed a numerical credit-scoring system based on a small number of key ratios. This has resulted in a bad debt ratio of 1.00%. Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 6 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit-scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates: Number of Accounts Credit Score under Proposed System Defaulting Paying 9,090 Total Better than 80 70 9,160 Worse than 80 30 810 840 Total 100 9,900 10,000 By refusing credit to firms with a poor credit score (worse than 80), Galenic calculates that it would reduce its bad debt ratio to 70 /9, 160, or just under 0.70%. While this may not seem like a big deal, Galenic's credit manager reasons that this is equivalent to a decrease of one-fifth in the bad debt ratio and would result in a significant improvement in the profit margin. Answer preferably in Excel please. 1. What is Galenic's current profit margin, allowing for bad debts? 2. Assuming that the firm's estimates of default rates are right, what would the profit per $100 of original sales be under the new credit-scoring system?
Transcribed Image Text:Galenic Inc. is a wholesaler for a range of phamaceutical products. Before deducting any losses from bad debts, Galenic operates on a profit margin of 6%. For a long time the firm has employed a numerical credit-scoring system based on a small number of key ratios. This has resulted in a bad debt ratio of 1.00%. Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 6 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit-scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates: Number of Accounts Credit Score under Proposed System Defaulting Paying 9,090 Total Better than 80 70 9,160 Worse than 80 30 810 840 Total 100 9,900 10,000 By refusing credit to firms with a poor credit score (worse than 80), Galenic calculates that it would reduce its bad debt ratio to 70 /9, 160, or just under 0.70%. While this may not seem like a big deal, Galenic's credit manager reasons that this is equivalent to a decrease of one-fifth in the bad debt ratio and would result in a significant improvement in the profit margin. Answer preferably in Excel please. 1. What is Galenic's current profit margin, allowing for bad debts? 2. Assuming that the firm's estimates of default rates are right, what would the profit per $100 of original sales be under the new credit-scoring system?
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