Problem: Berkshire Sports, Inc., operates a mail-order running-shoe business. Management is considering dropping its policy of no credit. The credit policy under consideration by Berkshire follows:
No Credit Credit
Price per unit--- $35 $40
Cost per unit--- $25 $32
Quantity sold--- 2000 3000
Probability of payment-- 100% 85%
Credit period--- 0 1
Discount rate---- 0 3%
A. Should Berkshire offer credit to its customers?
B. What must the probability of the payment be before Berkshire would adopt the policy?