1. The Branding Iron Company sells its irons for $50 apiece wholesale. Production cost is $40 per iron. There is a 25% chance that wholesaler Q will go bankrupt within the next year. Q orders 1,000 irons and asks for six months’ credit. Should you accept the order? Assume that the discount rate is 10% per year, there is no chance of a repeat order, and Q will pay either in full or not at all.
2. Look back at Cast Iron’s costs have increased from $1,000 to $1,050. Assuming there is no possibility of repeat orders, answer the following:
a. When should Cast Iron grant or refuse credit?
b. If it costs $12 to determine whether a customer has been a prompt or slow payer in the past, when should Cast Iron undertake such a check?
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