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 is calculated by dividing the profit per unit by the price per unit and then adjusting for the interest rate. The profit per unit is $225 - $185 = $40. The interest cost for 30 days is 1% of $225 = $2.25. The break-even default percent is $40 / ($225 + $2.25) = 17.0%.

Your Company Is Considering Granting Credit to a New Customer