Question

Company has decided to offer credit to its customers during the spring selling season. Sales are expected to be 10,000 softwares. The average cost to the firm of a software is $5,000. The owner knows that only 87 percent of the customers will be able to make the payments. To identify the remaining 13 percent, the firm is considering subscribing to a credit agency. The initial charge for the service is $1,050, with an additional charge of $20 per individual report. Should the firm subscribe to the agency?
Shows all the step and formula. Don't round off until you get the answer.

Answer 1

If the cost of subscribing to the credit agency is less than the savings from collection of the bad debts, the company should subscribe, otherwise company should not subscribe. Cost of the subscription = Initial charge + additional charge %3D Cost of the subscription = (1050+(20*10000)) %3D Cost of the subscription = $ 201,050/. Savings from not selling to bad credit risks = (10000*5000*13%) Savings from not selling to bad credit risks = $ 6,500,000/. Net savings = (6500000-201050) Net savings = S 6,298,950/. The company should subscribe to the credit agency.