On Each Nondelinquent Sale,Cast Iron Company Receives Revenues with a Present

question 62

Essay

On each nondelinquent sale,Cast Iron Company receives revenues with a present value of $1,200 and incurs costs with a present value of $1,000.Suppose that 10% of Cast Iron's customers are slow payers and that slow payers have a probability of 30% of defaulting on their bills.If it costs $5 to determine whether a customer has been a prompt or slow payer in the past,should Cast Iron undertake such a check? Hint: What is the expected savings from the credit check? It will depend on both the probability of uncovering a slow payer and the savings from denying these payers credit.

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Definitions:

Selling and Administrative Expenses

Costs incurred by a company not directly tied to the production of goods or services, including sales, marketing, and administrative functions.

Units

The basic measure of quantity in accounting, production, or inventory, often representing a single item or instance of a product.

Spending Variance

The difference between the actual amount spent and the budgeted or forecasted amount for a particular account or period.

Occupancy Expenses

Costs associated with occupying a space, such as rent, utilities, and property taxes.