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Galenic Inc. is a wholesaler for a range of pharmaceutical 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 9,160 840 Better than 80 70 Worse than 80 30 810 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. a. What is Galenic's current profit margin, allowing for bad debts? (Round your answer to 2 decimal places.)

Galenic Inc. is a wholesaler for a range of pharmaceutical 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 9,160 840 Better than 80 70 Worse than 80 30 810 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. a. What is Galenic's current profit margin, allowing for bad debts? (Round your answer to 2 decimal places.)

College Accounting, Chapters 1-27
College Accounting, Chapters 1-27
23rd Edition
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:HEINTZ, James A.
Chapter16: Accounting For Accounts Receivable
Section: Chapter Questions
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Retu Galenic Inc. is a wholesaler for a range of pharmaceutical 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 Total Defaulting Paying 9,090 Credit Score under Proposed System 9,160 840 Better than 80 70 810 Worse than 80 Total 30 100 10,000 006'6 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. a. What is Galenic's current profit margin, allowing for bad debts? (Round your answer to 2 decimal places.) O Answer is complete and correct. < Prev 8 of 8 Next W earch 近
Transcribed Image Text:Retu Galenic Inc. is a wholesaler for a range of pharmaceutical 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 Total Defaulting Paying 9,090 Credit Score under Proposed System 9,160 840 Better than 80 70 810 Worse than 80 Total 30 100 10,000 006'6 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. a. What is Galenic's current profit margin, allowing for bad debts? (Round your answer to 2 decimal places.) O Answer is complete and correct. < Prev 8 of 8 Next W earch 近
Return to b. 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Profit d. Suppose that one of the variables in the proposed new scoring system is whether the customer has an existing account with Galenic (new customers are more likely to default). Would you be more or less likely to accept the proposal? (Hint: Think about repeat sales.) More or less likely to accept the proposal? 8 of 8 ... < Prev Next ... isearch
Transcribed Image Text:Return to b. 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Profit d. Suppose that one of the variables in the proposed new scoring system is whether the customer has an existing account with Galenic (new customers are more likely to default). Would you be more or less likely to accept the proposal? (Hint: Think about repeat sales.) More or less likely to accept the proposal? 8 of 8 ... < Prev Next ... isearch
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