1. Credit

screening.

Tennindo, Inc. is starting up its new, cost-efficient gaming system console, the yuu. Tennindo currently has

3 comma 000

cash-paying customers and makes a profit of

$70

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 comma 400

customers per year, but that there will also be a default rate on credit sales of

5

%.

It costs

$220

to make a yuu, which retails for

$290

.

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?

If all customers (old and new) buy on credit, what is the cost of bad debt without credit screening?

$nothing

(Round to the nearest dollar.)

2. Credit

terms.

As manager of Fly-by-Night Airlines, you decide to allow customers

90

days to pay their bills. To encourage early payment, though, you allow them to reduce their bills by

1.5

%

if they pay within the first

41

days. At what implied effective annual interest rate are you loaning money to your customers? What if you extend the discount to

67

days and allow full payment up to

180

days?

At what implied effective annual interest rate are you loaning money to your customers?

nothing

%

(Round to two decimal places.)