Callahan Computers has decided to offer credit to its customers during the spring selling season. Sales are expected to be 1,000 units. The average cost per unit is $850. The owner knows that only
93% of the customers will be able to make their payments. To identify the remaining 7%, the
Company is considering subscribing to a credit agency. The initial charge for this service is $10,000,
With an additional charge of $8 per individual report. Calculate the net savings of subscribing the
Credit agency.

Question

Quizplus · Accepted Answer

Without credit agency subscription, Callahan Computers would lose money on the 7% of customers who do not make their payments.

Expected sales revenue = 1,000 x $850 = $850,000
Expected revenue from 93% of customers = 0.93 x $850,000 = $790,500
Expected revenue from 7% of customers = 0.07 x $850,000 = $59,500

With credit agency subscription, the company can identify the customers who are likely to default and take action to minimize losses.

Total cost of credit agency subscription = $10,000 + (0.07 x $8 x 1,000) = $10,560

Net savings = Expected revenue from 7% of customers - Total cost of credit agency subscription
= $59,500 - $10,560
= $48,940

Therefore, the best choice is B, as it provides the highest net savings.

Callahan Computers Has Decided to Offer Credit to Its Customers