Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 20% of their customers with an average loss of $300. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $12 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?
A) No, because the $24,000 cost is too high.
B) No, because a $300 loss is minor.
C) Yes, because the net gain is $30,000.
D) Yes, because the net gain is $48,000.
E) Yes, because the net gain is $60,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the expected value of the losses without the credit check:

Expected loss = 20% * 1,000 customers * $300 = $60,000

Next, we need to calculate the total cost of implementing the credit check:

Total cost = $12 * 1,000 customers = $12,000

Now, we can calculate the expected value of the losses with the credit check:

Expected loss = 2% * $300 * 1,000 customers = $6,000

Finally, we can calculate the net gain from using the credit check:

Net gain = $60,000 - $12,000 - $6,000 = $42,000

Since the net gain is positive, Collegiate Tuxedo should pursue the credit check. The correct answer is D.

Collegiate Tuxedo Rents Apparel Throughout the Year