ABC Corp is using NVP analysis to evaluate costs associated with orders. Custome
ID: 2670742 • Letter: A
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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