Samana Corporation expects to receive $1,500 along with costs of $1,000 on each non-delinquent sale on credit.The probability of collection is 60%.Determine whether credit should be extended.

Question

Quizplus · Accepted Answer

The expected revenue from each non-delinquent sale is $1,500 - $1,000 = $500. However, the probability of collection is only 60%. Therefore, the expected revenue from each sale is $500 x 0.6 = $300.

If credit is extended, the company will have a net benefit of $300 - $1,000 = -$700 if the customer defaults (40% probability). On the other hand, if the customer pays, the company will have a net benefit of $300.

Overall, the expected net benefit from extending credit is: 
(0.6 x $300) - (0.4 x $700) = $180 - $280 = -$100

Since the expected net benefit is negative, it is not financially beneficial to extend credit, and the company should not extend credit. Therefore, the correct answer is option C.

Samana Corporation Expects to Receive $1,500 Along with Costs of $1,000