Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI's products, primarily used in the manufacture of semiconductors, currently sell for $1,140 per unit. The variable cost is $760 per unit. The order under consideration is for 15 units today; payment is promised in 30 days.
a. If there is a 20 percent chance of default, should SWI fill the order? The required return is 2 percent per month. This is a one-time sale, and the customer will not buy if credit is not extended.
b. What is the break-even probability in part (a)?
c. This part is a little harder. In general terms, how do you think your answer to part (a) will be affected if the customer will purchase the merchandise for cash if the credit is refused? The cash price is $1,090 per unit.