Little Runabout Inc.makes small trailers for light-duty towing behind SUVs and small pickup trucks.Its trailers typically sell for $2,500.Many of its customers have asked for credit terms to aid in purchasing the trailers.The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?

Question

Quizplus · Accepted Answer

The profit with credit policy can be calculated as follows:
Total revenue from sales = 10,000 trailers * $2,500 = $25,000,000
Total production cost = 10,000 trailers * $1,500 = $15,000,000
Total lost sales = 2,000 trailers * $2,500 = $5,000,000
Total defaulted payments = 10,000 trailers * 3% * $2,500 = $750,000
Total credit sales = $25,000,000 - $5,000,000 = $20,000,000
Total profit = $20,000,000 - $15,000,000 - $750,000 = $4,250,000
Therefore, the best choice is B.