Question

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?

Answer 1

increase in income = $18736

Step-by-step 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