Over the past few years, the marketing department at Goldston & Co. has convinced the finance department to permit credit sales to increasingly marginal customers. Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested that the credit policy be tightened to reduce bad debt losses. The proposal calls for a more restrictive policy under which sales would fall by 8% but bad debt losses would drop to 2.6% of revenue. Under the current policy, Goldston’s revenue forecast is $400 million with a contribution margin of 38%. Implementing the new credit policy would have no effect on contribution margin but would require an additional $500,000 in annual fixed costs.
a. Should Goldston implement Finance’s new credit policy?
b. What nonfinancial considerations should be evaluated?
c. Should the new policy be implemented if bad debts are expected to drop only to 4% of revenues?