As treasurer of the Universal Bed Corporation, Aristotle Procrustes is

QUESTION

As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4%. If the cost of goods sold is 80% of the selling price, should Mr. Procrustes adopt the more stringent policy?
Here we will calculate the cost involved in this decision and benefit achieved, accordingly: Benefit due to reduction bad debts = 2% Benefit foregone by reduction in sales =¦

5%*20% = 1% Here Benifit is > cost involved, accordingly Mr. Procrustes should adopt the more stringent policy.

ANSWER:

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