U Ltd. is considering its credit policy. The credit period is one month. It is expected that production cost will be $58 per unit and price will be $65 per unit. Based on historical experience, the default rate is 10%. The discount rate is 2% per month.
1) Assuming this is a one-time order, should the company offer credit to its customers? Why?
2) Now suppose that customers who do not default become repeat customers, should the company offer credit to its customers? Why?