Also assume that the customer will either pay in 30 days or will default. What is the cost of switching?

Question

Quizplus · Accepted Answer

The cost of staying with the current supplier is: 
- $100,000 x 0.05 x (60/365) = $822.19

The cost of switching to the new supplier is: 
- $101,000 x 0.05 x (30/365) = $416.44
- $100,000 x 0.03 x (30/365) = $246.58
- $4,300 = given

If the customer pays in 30 days, the total cost of switching is: $416.44 + $246.58 + $4,300 = $4,963.02 
If the customer defaults, the total cost of switching is: $416.44 + $246.58 + $100,000 = $100,663.02

Therefore, the best choice is to switch to the new supplier as long as the probability of the customer defaulting is less than 0.64% (i.e. $4,300/$100,663.02)

Also Assume That the Customer Will Either Pay in 30