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A customer applies for credit at your firm. Your terms are net 35 days. The customer’s...

A customer applies for credit at your firm. Your terms are net 35 days. The customer’s D&B report reveals that he pays on the net date only 10% of the time. He pays 30 days late 60% of the time, he pays 60 days late 20% of the time, and he pays 90 days late 10% of the time (with necessary assistance being provided by a collection agency).

The item he wishes to buy has an invoice price of $2,000 and your variable cost is $1,850. Your credit administration/collection costs are $40 per month, beginning when an invoice has passed its net date. After referral to the collection agency, the collection agency keeps 30% of all funds collected as its fee.

Your annual cost of capital is 11%. Should you grant credit to this applicant?

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jeff jeffy answered 2 years ago
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