Jomal Corporation expects to receive $2,300 along with costs of $1,800 on each non-delinquent sale on credit.The probability of collection is 85%.Determine whether credit should be extended.

Question

Quizplus · Accepted Answer

The expected net benefit from extending credit is calculated as follows: Expected revenue from a sale ($2,300) minus the costs ($1,800), which equals $500. This net benefit is then multiplied by the probability of collection (85%), resulting in an expected net benefit of $425. However, there's a 15% chance of not collecting, which means bearing the full cost of $1,800. The expected loss from this scenario is $1,800 * 15% = $270. The net expected benefit from extending credit is therefore $425 (expected benefit) - $270 (expected loss) = $155. Therefore, it is beneficial to extend credit.

Jomal Corporation Expects to Receive $2,300 Along with Costs of $1,800