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24 March, 17:08

Conceptual Connection: If Gilmore's estimate of bad debts is correct (2.2% of credit sales) and the gross margin is 20%, by how much did Gilmore's income from operations increase assuming $150,000 of the sales would have been lost if credit sales were not offered?

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  1. 24 March, 17:32
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    increase in income = $18736

    Explanation:

    solution

    we consider here 2 case

    case 1 is

    Credit Sales with bad debt estimation @ 2.2%

    and

    Case 2 is

    Cash Sales only

    so as in both the cases we are indifferent towards cash sales of $135000 as Gilmore would earn the same margin and there is no bad debt scenario.

    so in case 1 gross margin is

    Gross Margin = 20% of 512000

    Gross Margin = $102400

    and

    Bad Debt Estimation @ 2.2% is = $11264

    so Net Margin = $102400 - $11264 =

    Net Margin = $91136

    and

    in case 2 is

    as company have gone for all cash sales then it will able to sell $150000 less

    so cash Sales = 512000 - 150000

    cash Sales = $362000

    and

    Margin = 20% of 362000

    Margin = $ 72400

    so that increase in income from operations by selling on credit is

    increase in income from operations by selling on credit = 91136 - 72400

    increase in income = $18736
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