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.)
Chapter1: Financial Statements And Business Decisions
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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
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.
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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?
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