Question

The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring...

The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 625 bicycles. The average cost to the shop of a bicycle is $400. The owner knows that only 98 percent of the customers will be able to make their payments. To identify the remaining 2 percent, the company is considering subscribing to a credit agency. The initial charge for this service is $600, with an additional charge of $4 per individual report.

  

a. What is the cost of the subscription to the credit agency? (Do not round intermediate calculations.)
b. What is the savings from collection of the bad debts? (Do not round intermediate calculations.)
c. What are the company's net savings from subscribing to the credit reports? (Do not round intermediate calculations.)
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Answer #1

a)Cost of subscription to the credit agency = Initial Charge + Additional Charge per individual report

= $600 + $4*625

= $600 + $2,500

= $3,100

.

b)Savings from collection of bad debts = No of Bicycle expected to be sold*Cost of Bicycle * Percentage of Bad Debts

= (625*400)*2%

= $5,000

.

c)Company's net savings from subscribing to the credit reports = Savings from collection of bad debts - Cost of subscription to the credit agency

= $5,000 - $3,100

= $1,900

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