ABC Inc. is starting up its new, cost-efficient gaming system console. ABC Inc. currently has 4,000 cash-paying customers and makes a profit of $80 per unit. ABC Inc. wants to expand its customer base by allowing customers to buy on credit. It estimates that credit sales will bring in an additional 1,300 customers per year but that there will also be a default rate on credit sales of 5%. It costs $260 to make a console, which retails for $340. If all customers (old and new) buy on credit, what is the cost of bad debt without credit screening? What is the most ABC Inc. would pay for credit screening that accurately identifies bad-debt customers prior to the sale? What are the increased profits by adding credit sales for customers with and without credit screening? Should ABC Inc. offer credit sales if credit screening costs $10 per customer?
Cost of bad debt:
Maximum cost of Credit Screen:
Old Profits =
Cost per Customer =
New Profits of firm without Credit Screen =
New Profits with Credit Screen =