Consider the following information about two alternative credit strategies:

The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90 days, and the cost of debt is 0.75 per cent per month.

(a) Based on this information, should credit be granted?

(b) In part (a), what does the credit price per unit have to be to break even?

(c) In part (a), suppose we can obtain a credit report for £2 per customer. Assuming that each customer buys one unit and that the credit report correctly identifies all customers who will not pay, should credit be extended?

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Price per unit Cost per unit Quantity sold per quarter Probability of payment Refuse Credit 51 29 3,300 1.0 Grant Credit 55 31 3,500 0.90