Aviation Gauges Company makes wind and current gauges for pleasure planes. The gauges are sold throughout the Europe to plane dealers, and the average order size is €150. The company sells to all registered dealers without credit analysis. Herbert Dison, vicepresident of finance, is now uneasy about the increasing number of bad losses on new orders. With credit ratings from local and regional credit agencies, he feels she would be able to classify new orders into one of three risk categories. Past experience shows the following:
Risk low med high
Percent of category orders to total orders 20 50 30
Percent bad-debt loss in each category 2 8 25
Cost of producing and shipping gauges and carrying receivables is 80 percent of sale. Surprisingly, there is no association between the risk category and the collection period. Cost of obtaining credit-rating information and evaluating it is €5 per order.
Based on this information, should the company obtain credit information on new orders instead of selling to all new accounts without credit analysis?