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?

---

Definitions:

Corporation

A legal entity recognized by law, formed to conduct business and capable of suing or being sued.

Financial Intermediary

An entity that acts as a middleman between two parties in a financial transaction, such as banks, investment funds, and insurance companies.

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, as the scale of operation and output increases.

Capital Markets

Financial markets for buying and selling equity and debt instruments, facilitating the raising of capital.