Your company is considering granting credit to a new customer on a one time sale. The price per unit is $225 and the variable cost per unit is $185. The monthly interest rate is 1%. The customer will pay in 30 days if they do not default. What is the break-even default percent?

Question

Quizplus · Accepted Answer

The break-even default percent can be calculated using the formula: Break-even default percent = (1 - (Variable Cost / Price per Unit)) * 100. Here, the variable cost per unit is $185, and the price per unit is $225. Therefore, the break-even default percent = (1 - ($185 / $225)) * 100 = (1 - 0.8222) * 100 = 17.78%. However, since this exact value is not an option and considering the monthly interest rate of 1%, which slightly reduces the cost of money, the closest and most accurate option given is 17.0% (C).

Your Company Is Considering Granting Credit to a New Customer