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 profit 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

The profit with a cash-only policy is calculated by multiplying the number of trailers sold by the profit per trailer. Without credit, 8,000 trailers are sold (10,000 - 2,000 lost sales). The profit per trailer is $1,000 ($2,500 - $1,500). Thus, the profit is 8,000 x $1,000 = $8,000,000.