The Silver Spokes Bicycle Shop has decided to offer credit to its customers duri
ID: 2776645 • Letter: T
Question
The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles. The average cost to the shop of a bicycle is $525. The owner knows that only 96 percent of the customers will be able to make their payments. To identify the remaining 4 percent, the company is considering subscribing to a credit agency. The initial charge for this service is $750, with an additional charge of $10 per individual report.
What are the company's net savings from subscribing to the credit reports? (Do not round intermediate calculations.)
What is the cost of the subscription to the credit agency? (Do not round intermediate calculations.)Explanation / Answer
In order to decide if the company should subscribe to the agency ,we need to compare the revenue that the company would generate by selling the remaining 4%of the bicycles to the total cost of subscribing to the credit agency.The company should subscribe if revenue is greater than the cost
Total sales=600 bicycle
Average cost =$525per bicycle
Fixed cost for service=$750
Variable cost =$10 per customer
First ,we need to calculate the revenue of the company would have by selling the remaining 4% of the bicycles by multiplying the average cost per bicycle remains 4%of total sales.
Revenue =(0.04*600) *525
=$12600
So, by selling the remaining 4% ,the company will generate revenue of $12600
Then ,we need to calculate the total cost for subscribing the agency
Total cost = (600*10)+750
= $6750
Total cost is $6750
NPV =total cost-revenue
=12600-6750
=$5850
Cost of subscription is $6750
The company will have a NPV of $5850 by subscribing to agency .so, they should subscribe to the agency
Savings from not selling to bad credit risks $12600Related Questions
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