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  3. bike n work co. is a shop that sells bike groupset

Bike n Work Co. is a shop that sells bike groupsets. In selling the product,...

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Accounting

Bike n Work Co. is a shop that sells bike groupsets. In selling the product, the shop is applying only all-cash policy. However, due to increasingly fierce competition in the industry, the shop is considering of implementing a 30-day credit policy. At the moment, the shop sells 10 units of groupset every month. The current price and the variable cost per unit are IDR 12 million and IDR 8 million, respectively. If Bike n Work does switch to net 30 days on sales, it predicts that the quantity sold may rise by 40% and costs will increase by 25% per unit. Meanwhile, the groupset's price under the new policy will be (10+3)% higher.

  1. If the required return is 0.90 percent per month, should Bike n Work determine if the company should proceed or not.
  2. Assume new orders for (20 +3) bike groupsets have been made by customers requesting credit. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 50 such orders is never collected. Assuming that this is a one-time order, should credit be extended? (Hint: use the predicted price and variable cost if the new policy is applied).
  3. What is the break-even probability of default in part (b)?

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