A customer has ordered goods generating a present value of $1,200. The present value of production costs is $800. Under what conditions should you extend credit if there is no possibility of repeat orders?
A)If the probability of payment exceeds 0.67
B)If the probability of payment exceeds 0.75
C)If the probability of payment exceeds 0.80
D)If the probability of payment exceeds 0.90

Question

Quizplus · Accepted Answer

The expected profit is positive if the probability of payment times the present value of the order ($1,200) exceeds the present value of production costs ($800). This occurs when the probability of payment exceeds 0.67 (800/1200).

A Customer Has Ordered Goods Generating a Present Value of $1,200