Silicon Wafers plc (SW), is debating whether to extend credit to a particular customer. SW’s products, primarily used in the manufacture of semiconductors, currently sell for £1,850 per unit. The variable cost is £1,200 per unit. The order under consideration is for 12 units today; payment is promised in 30 days.

(a) If there is a 20 per cent chance of default, should SW fill the order? The required return is 2 per cent per month. This is a one-time sale, and the customer will not buy if credit is not extended.

(b) What is the break-even probability in part (a)?

(c) This part is a little harder. In general terms, how do you think your answer to part (a)

will be affected if the customer will purchase the merchandise for cash if the credit is refused? The cash price is £1,700 per unit.