Problem 9-1c

Problem 9-1C

The bonus plans that have been put in place at New Market Building Supplies could cause conflict between the sales manager and the credit manager. If the sales manager has a goal to increase sales, could in turn increase the bad debt expense, the more sales a company has increases the risk for bad debt expense. The company also only accepts its own credit card and does not accept other cards, which puts them at higher risk when collecting money on account. If new Market Building Supplies accepted other credit cards the company would receive the money from the third party creditor. Since they only accept their own credit card, if the account receivable is not collected then they are out the money, potentially increasing the bad debt expense.

The conflict could be resolved by allowing the sales manager and credit manager work as a team. The sales manager could still receive a bonus for increasing sales, but the credit manager’s bonus could be based on keeping the bad debt expense under a certain ratio according to the sales that have been made. For example, for every $10 000 in sales made allowing an allowance for $1 000 for the bad debt expense. Keeping the ratio at 10:1 or below as a target for the credit managers bonus. This would allow the two to work together. The company could also look in to changing some of it policies to decrease the bad debt expense, such as accepting other credit cards. This approach will incur processing fees but it could still save money in the long run. If the processing fees are less than the bad debt expense that they would sustain when collecting accounts receivable.