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? Given this amount, what is the maximum average amount per customer that the firm should spend on credit screening?
A) $450,000; $45.00
B) $450,000; $56.25
C) $4,500,000; $450.00
D) $4,500,000; $$562.50

Question

Quizplus · Accepted Answer

The dollar value of bad debts the firm expects to accumulate over a year can be calculated as follows:
Default rate * Credit sales * Price per unit = 0.03 * (10,000-2,000) * $2,500 = $450,000
To calculate the maximum average amount per customer that the firm should spend on credit screening, we can divide the expected bad debts by the number of credit sales:
Maximum average amount per customer = Expected bad debts / Credit sales = $450,000 / 8,000 = $56.25.
Therefore, the best choice is A.

Travel and Tow Trailers Inc $$56250