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 Credit Score under Proposed System Defaulting Paying 9,160 9,090 810 70 Better than 80 30 840 Worse than 80 100 9,900 10,000 Total 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 equivatent 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.) Net profit margin %
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 Credit Score under Proposed System Defaulting Paying 9,160 9,090 810 70 Better than 80 30 840 Worse than 80 100 9,900 10,000 Total 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 equivatent 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.) Net profit margin %
Chapter6: Business Expenses
Section: Chapter Questions
Problem 43P
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What is Galenics current profit margin allowing for bad debit
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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
Defaulting
Total
Credit Score under Proposed System
Paying
9,090
9,160
840
10,000
70
Better than 80
30
810
Worse than 80
100
9,900
Total
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.)
Net profit margin
%
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