Frank\'s Formals rents apparel throughout the year. They have experienced non-pa

Question

Frank's Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $400. Frank's wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

No, because the $15,000 cost is too high. No, because a $400 loss is minor. Yes, because the net gain is $30,000. Yes, because the net gain is $45,000. Yes, because the net gain is $60,000.

Explanation / Answer

Ans is yes because net gain is 45,000 Average Loss            400.00 Average Loss on 1,000 customer (1,000*400*15%)      60,000.00 Cost of customer check per customers              15.00 Cost of customer check for 1,000 customers(1,000*15)      15,000.00 Net Gain (Benefit - Cost) (60,000 - 15,000)      45,000.00

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