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 change in the profit if the firm moves from a cash-only policy to a credit policy?
A)$1,250,000
B)$8,000,000
C)$9,250,000
D)$15,000,000

Question

Quizplus · Accepted Answer

The change in profit is calculated by considering the additional sales from offering credit, minus the cost of defaults. Without credit, sales are 8,000 trailers (10,000 - 2,000 lost sales). With credit, sales are 10,000 trailers. The additional 2,000 trailers sold at a profit of $1,000 each ($2,500 - $1,500) results in $2,000,000. The default cost is 3% of 10,000 trailers at $2,500 each, which is $750,000. The net change in profit is $2,000,000 - $750,000 = $1,250,000.