On each nondelinquent sale Cast Iron receives revenues with a present value of $

Question

On each nondelinquent sale Cast Iron receives revenues with a present value of $1,230 and incurs costs with a present value of $1,080. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .95. a-1. What is the expected profit of granting credit? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected profit $ per sale a-2. Should Cast Iron grant or refuse credit? Grant Refuse b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.) Break-even probability %

Explanation / Answer

Profit = Revenues – Costs

            = 1,230 – 1,080

            = $150

1. Expected profit = (Revenue × Probability) – Cost

                             = ($1,230 × 0.95) – 1,080

                             = 1,168.5 – 1,080

                             = $88.5 (Answer)

2.

C should grant credit, since it earns profit as above.

3.

Break-even collection would the amount of cost, since there will be no-profit-no-loss.

Break-even probability of collection = (Costs / Revenues) × 100

                                                            = ($1,080 / $1,230) × 100

                                                            = 87.8% (Answer)

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