Sports Experts Inc. makes high-quality skateboards for amateurs. The company wholesales its products in groups of 10 for a package price of $1,500.
Because of the high price, resllers have asked for credit terms to aid in purchasing the process.
The firm's finance department has estimated the following profile for its long boards and customer base:
Annual sales: 10,000 long board packages
Annual production costs per board package: $1,000
Lost sales if credit is not provided for customers: 1,200 long board packages.
Default rate if all customers purchase on credit: 4.00%
1. What is the profit if the firm has a credit policy?
2. What is the change in the profit if the firm moves from a cash-only policy to a credit policy?
3. What is the dollar value of bad debts the firm expects to accumulate over a year?
4. Given the bad-debt dollar amount, what is the maximum average amount per long board package that the firm should spend on credit screening?