OB 1's credit manager studied its customer and discovered that 92% were prompt payers. The records also showed that 18% of the slow payers and 3%of the prompt payers subsequently defaulted. The company now has 1500 accounts in its books, none of which has defaulted.
a) What is the total expected number of defaults , assuming no repeat business
b) Assume revenue from sale of $2,000 and cost of sales is $1,740. What is the expected profit(loss) from extending credit to slow payers.
c) How much should prices be increased to make extending credit slow payers worthwhile?
d) Estimate payoff from credit check if the cost of search is $75, probability of identifying a slow payer is 20% and expected loss from a slow payer?