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Creidt Policy at Mucklehoney Sports

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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?

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Solution Summary

The solution details the potential credit policy at Mucklehoney Sports. The probability of payment is also calculated.

Solution Preview

1. Cash policy:
Profit per unit=Price-Cost
Profit per unit=$35-$25
Profit per unit=$10
Units sold * Profit per unit=Total Profit
2,000*$10=$20,000

Credit policy:
Profit per unit=Price-Cost
Profit per unit=$40-$32
Profit per unit=$8
Units sold*Profit per ...

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