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: 12,000 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 dollar value of bad debts the firm expects to accumulate over a year?
A)$9,250,000
B)$6,500,000
C)$540,000
D)$450,000

Question

Quizplus · Accepted Answer

To calculate the dollar value of bad debts, we need to first calculate the number of customers who will default on their payments. From the given information, we know that 3.00% of all customers who purchase on credit will default.

So, if 2,000 trailers are purchased on credit (because those customers would have been lost if credit wasn't provided), then 2,000 x 0.03 = 60 customers will default.

The dollar value of bad debts will be the credit given to those customers who default, which is 60 x $2,500 = $150,000.

Therefore, the correct answer is option C.