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 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 dollar value of bad debts the firm expects to accumulate over a year?
A)$9,250,000
B)$4,500,000
C)$8,000,000
D)$450,000

Question

Quizplus · Accepted Answer

The dollar value of bad debts is calculated by multiplying the total sales on credit by the default rate. If credit is provided, the firm expects to sell 10,000 trailers. The default rate is 3%, so the bad debts are 10,000 trailers * $2,500 * 3% = $750,000. However, the correct calculation should be based on the number of trailers sold on credit, which is 8,000 (10,000 - 2,000 lost sales). Therefore, 8,000 * $2,500 * 3% = $600,000. The correct answer should be $600,000, but since it's not listed, the closest option is $450,000.