Question

Your company is considering granting credit to a new customer for a one time sale. The variable cost per unit is $30; the current price per unit is $60; and the monthly required return (cost of capital) is 2%. What probability of default for the new customer would make the firm break even when granting credit for the one time sale?

A) 2%

B) 49%

C) 51%

D) 98%

E) 99%

Answer 1

variable cost is 30

per unit price = 60

required rate is 3%

let p be the probability of default

variable cost = (1-p)saleprice/(1+R)

30=60(1-p)/1.02

p is 49%

so answer is option B