The Silver Spokes Bicycle Shop has decided to offer credit to its customers duri

Question

The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 840 bicycles. The average cost to the shop of a bicycle is $200. The owner knows that only 93 percent of the customers will be able to make their payments. To identify the remaining 7 percent, the company is considering subscribing to a credit agency. The initial charge for this service is $690, with an additional charge of $5 per individual report. What is the cost of the subscription to the credit agency? What is the savings from collection of the bad debts? What are the company's net savings from subscribing to the credit reports? Should company subscribe to the agency?

Explanation / Answer

Cost of subscription = $690 + 840*7%*5

= $984

Savings from not selling to bad credit risks = $200*840*7%

= $11760

Net Benefit from agency services = $10776

It is advice to subscribe to agency

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