Determine the Break-Even Probability of Collection for the Following Seller

question 66

Essay

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.Given these characteristics of credit, what is the expected profit from a customer that is perceived to offer an 85% probability of collection?

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Definitions:

Aversion Therapy

A form of psychological treatment in which an undesirable behavior is paired with an unpleasant stimulus to reduce the frequency of the behavior.

Classical Conditioning

A learning process that occurs when two stimuli are repeatedly paired; a response that is at first elicited by the second stimulus is eventually elicited by the first stimulus alone.

Unpleasant Stimuli

Refers to any external factors or conditions that are disagreeable or discomforting to an individual.

Desensitization

A process in which an individual is gradually exposed to a feared object or context, diminishing their emotional response to it.