On each nondelinquent sale Cast Iron receives revenues with a present value of $
ID: 2773825 • Letter: O
Question
On each nondelinquent sale Cast Iron receives revenues with a present value of $1,400 and incurs costs with a present value of $1,250. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .85.
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.)
On each nondelinquent sale Cast Iron receives revenues with a present value of $1,400 and incurs costs with a present value of $1,250. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .85.
Explanation / Answer
(a1) Assume there are 100 customer
Expected Revenue from customers (since only 85% will pay) is 1400 * 100 *0.85 = $119,000
Cost of production of Cast Iron = $125,000
Therefore Profit = 119,000 -125,000 = - $6,000
Therefore, there is a loss of $6,000 for 100 customers and
A loss of $60 per customer
(a2) Cast Iron should REFUSE Credit because there will be a loss
b. Calculating Break even probabilty
Consider x as the breakeven probability
1400 (x) =1250;
x= 1250/1400 = 0.89285
Thefore breakeven probability is 0.9 (rounded to one decimal place)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.