What Credit Decision Is Appropriate for a Potential Customer That

question 33

Multiple Choice

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

• A)Grant credit since expected profit is $3,200
• B)Grant credit since expected profit is $800
• C)Refuse credit since expected profit is zero
• D)Refuse credit since expected loss is $3,000 Expected profit from offering credit:
• = p x PV(Rev - cost) - (1 - p) x PV(cost)
• = )8 x PV($10,000 - 8,000) - .2 x PV(8,000)
• = PV1,600 - PV1,600

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Definitions:

High-low

A technique used in accounting and finance to estimate fixed and variable costs by analyzing the highest and lowest levels of activity.

Cost Estimation

The process of predicting the costs of producing a product or service, typically involving historical data analysis and forecasting techniques.

Cost Line

A graphical representation of the costs incurred by a company, set against a range of production or service volumes.

Relevant Range

The range of activity within which the assumptions about fixed and variable costs are valid for the purposes of cost behavior analysis and budgeting.