What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?
101. Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?
A. Break-even probability is higher than for single sale customers.
B. Break-even probability is lower than for single sale customers.
C. The break-even probability does not change between single sale and repeat sale customers.
D. Sales should never be refused for customers offering the potential of repeat sales.
102. Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.
A. No; the expected loss is $33.33.
B. No; the expected loss is $150.00.
C. Yes; the expected profit is $33.33.
D. Yes; the expected profit is $150.00.
103. What is the break-even probability in the following case? A customer wishes to purchase a $2,000 item that has been marked up 50% over cost and the probability of collection is only 65%. Assume all cash flows are discounted to present value.
104. What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.
105. Which of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?
A. The discount rate is fairly high.
B. The cost of the item will continually decline.
C. The sales price of the item will continually increase.
D. Payment on the first order ensures payments on subsequent orders.
106. Which of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?
A. Reject because expected loss equals $320
B. Reject because expected profit equals $0
C. Accept because expected profit equals $1,440
D. Accept because expected profit equals $3,200
107. A firm is considering a one-time sale of $100,000 to a customer. The cost of goods sold for this sale is $90,000. If the probability of the customer paying is 0.8, what is the expected profit from this transaction?
108. What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?
109. A firm with ______ profit margin should extend credit to customers with a high probability of default.
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