Check my work Consider the case of the Cast Iron Company. On each nondelinquent
ID: 2799231 • Letter: C
Question
Check my work Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1260 and incurs costs with a present value of $1,000. Cast lron's costs have increased from $1,000 to $1,110. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the custorner is p-0.95, answer the following a-1. What is the expected profit of granting credit? (Do not round intermediate calculations.) a-2 Should Cast Iron grant or refuse credit? O Grant Refuse s the break even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)Explanation / Answer
a-1. Expected Profit= Expected Collection of Revenue - Cost
Expected Collection of Revenue = probability*present value of revenue
= 0.95*1260 = 1,197
Expected Profit = 1,197 - 1,110 = 87
a-2. Cast Iron should grant credit as the expected profit is positive.
b. Breakeven is the point where revenue equals cost. In this case, revenue should be 1,110
Breakeven Probability =Break even Revenue/ Revenue
= 1,110/1,260 = 0.8809