ABC Corp is using NVP analysis to evaluate costs associated with orders. Custome

Question

ABC Corp is using NVP analysis to evaluate costs associated with orders. Customer credit terms are net 30 days. The opportunity costs to ABC are 10 %. The variables costs to the company for each sale is 60% of the sale and administration of credit to customers is 1.5% of sales.

A. If an order amount from a new customer is $50,000, and the customer pays is willing to pay within the 30 days allowed, should credit be extended?
B. Assume the analysis of payment receipts reveals the following probabilities of payment:

Payment timing Probability
Within 30 days .60
31 – 60 days .25
61-90 days .10
90+ days .05

ABC’s knows that customers pay after 90 days only when the bill has been sent to collections through a collection agency. The collection agency used, charges 50% of the amount collected, but collects, on average 75% of the amount invoiced within 30 days of receiving the referral. Between the initial net 30 and the time the charge is sent for collection, the company had a cost of $150 for every 30 days the bill is not paid. Based on this additional information, what is the NVP for the $50,000 order? Should ABC extend the credit to the new customer?

Explanation / Answer

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