Problem: Mucklehoney Sports operates a mail-order running shoe business. Management is considering adopting a credit policy to expand its business from an all sales for cash. The credit policy under consideration is as follows:
Credit CreditNo
Price per unit $35 $40
Cost per unit $25 $32
Quantity sold 2,000 3,000
Probability of payment 100% 85%
Credit period 0 1
Discount rate 0 3%
1. Should Mucklehoney offer credit to its customers?
2. What must the probability of payment be before Berkshire would adopt the policy?