Please work problems; formula and showing how to solve problem.
Texas Computers (TC) recently has begun selling overseas. It currently has thirty foreign orders outstanding, with the typical order averaging $2,500. TC is considering the following three alternatives to protect itself against credit risk on these foreign sales:
Request a letter of credit from each customer. The cost to the customer would be $75 plus 0.25 percent of the invoice amount. To remain competitive, TC would have to absorb the cost of the letter of credit.
Factor the receivables. The factor would charge a nonrecourse fee of 1.6 percent.
Buy foreign credit insurance. The insurer would charge a 1 percent insurance premium.
Q1. Which of these alternatives would you recommend to Texas Computers? Why?
Q2. Suppose that TC's average order size rose to $250,000. How would that affect your decision?