Barn Yard Inc. is a wholesaler that stocks engine components and tests equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.6 million per unit, and the credit price is $1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8% per period.

a) Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. (3 marks)

b) Assuming the customer becomes a repeat customer, what is the break-even probability of default? (2 marks)