Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1,000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?
A) No, because the $7000 cost is too high.
B) No, because a $200 loss is minor.
C) Yes, because the net gain is $30,000.
D) Yes, because the net gain is $23,000.
E) Yes, because the net gain is $193,000.

Question

Quizplus · Accepted Answer

Without any credit checks, the average loss due to non-payment is 15% of $200, which is $30 per customer. Thus, the cost of non-payment is ($30 * 1,000) = $30,000.

If Collegiate Tuxedo uses an electronic credit check, then the cost will be $7 * 1,000 = $7,000.

Assuming that the opportunity cost is 1.5% for a five-day credit period, the interest cost per customer is ($200 * 1.5% * 5/365) = $0.014. Thus, the net gain from the credit check is ($30 - $7 - $0.014 * 1,000) = $23,000.

Therefore, Collegiate Tuxedo should pursue the credit check as it results in a net gain of $23,000.

Collegiate Tuxedo Rents Apparel Throughout the Year