Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers
The firm's finance department has estimated the following profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?
A) $25,000,000
B) $9,250,000
C) $450,000
D) $8,000,000
Answer: B
Explanation: B) Trailers sold × (Price - Cost) - Bad Debt = 9,700 × ($2,500 - $1,500) - bad debt
= $9,700,000 - (0.03 × 10,000) × $1,500 = $9,250,000.
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