Travel and Tow Trailers 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 it 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 margin if the firm has a cash-only policy?
A) $9,250,000
B) $25,000,000
C) $8,000,000
D) $15,000,000

Question

Quizplus · Accepted Answer

If the firm has a cash-only policy, it will sell 8,000 trailers (10,000 - 2,000 lost sales) and make a profit of $1,000 per trailer ($2,500 - $1,500 production cost). Therefore, the total profit will be $8,000,000 (8,000 trailers x $1,000 profit per trailer). This is higher than the profit margin if credit is offered because the default rate will reduce the profits.