I can\'t figure this one out! Credit screening. Tennindo, Inc. is starting up it

Question

I can't figure this one out!

Credit screening. Tennindo, Inc. is starting up its new, cost-efficient gaming system console, the yuu. Tennindo currently has 4,000 cash-paying customers and makes a profit of $80 per unit. Tennindo wants to expand its customer base by allowing customers to buy on credit. It estimates that credit sales will bring in an additional 1,100 customers per year, but that there will also be a default rate on credit sales of 5%. It costs $230 to make a yuu, which retails for $310. If all customers (old and new) buy on credit, what is the cost of bad debt without credit screening? What is the most Tennindo would pay for credit screening that accurately identifies bad-debt customers prior to the sale? What are the increased profits from adding credit sales for customers with and without credit screening? Should Tennindo offer credit sales if credit screening costs $10 per customer?

Explanation / Answer

Cost of Bad Debt (4000+1100)*0.05*230 58650 Maximum Credit Screening Cost Existing Profit 4000*80 320000 320000= (5100*80*0.95)-Screening Cost Screening Cost 387600-320000 Screening Cost 67600 Screening Cost per customer 67600/5100 Screening Cost per customer                                                                               13.25 Profit without credit screen (5100*80*0.95)-(5100*0.05*230) 328950 Profit with credit screen (5100*80*0.95)-(5100*10) 336600

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