Credit Analysis. Galenic, Inc., is a wholesaler for a range of pharmaceutical products. Be- fore deducting any losses from bad debts, Galenic operates on a profit margin of 5 percent. For a long time the firm has employed a numerical credit scoring system based on a small number of k e y ratios. This has resulted in a bad debt ratio of 1 percent.
Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 8 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
|C r edit Sco r e under P r oposedSystem||Defaulting||P a ying||T otal|
|Better than 80||60||9,100||9,160|
|Worse than 80||40||800||840|
By refusing credit to firms with a poor credit score (worse than 80) Galenic calculates that it would reduce its bad debt ratio to 60/9,160, or just under .7 percent. While this may not seem like a big deal, Galenic’s credit manager reasons that this is equivalent to a decrease of one-third in the bad debt ratio and would result in a significant improvement in the profit margin.
What is Galenic’s current profit margin, allowing for bad debts?
Current profit margin before deduction of bad debt ratio is 5% and bad debt ratio is currently at 1%, so to arrive at the new profit margin we need to deduct the bad debt ratio from it and so after allowance of bad debts, profit margin would be (5%-1%= 4%). b. if the assessment of Gelenic is………………………………………………………….
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