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? Given this amount,what is the maximum average amount per unit sold that the firm should spend on credit screening?
A)$450,000; $37.50
B)$450,000; $45.00
C)$4,500,000; $450.00
D)$4,500,000; $$562.50

Question

Quizplus · Accepted Answer

To find the dollar value of bad debts, we need to multiply the number of credit sales by the default rate by the sale price of each trailer:
12,000 trailers x (1-2,000/12,000) x 0.03 x $2,500 = $450,000

To find the maximum average amount per unit sold that the firm should spend on credit screening, we need to divide the expected bad debts by the number of credit sales:
$450,000 / 12,000 = $37.50

Therefore, the best choice is (A) $450,000; $37.50.

Little Runabout Inc $$56250