CMA Intermediate · Financial Management and Business Data Analytics · Receivable Management
A firm grades customers into risk classes. For a class whose probability of default is 8%, the firm sells goods with a price of Rs 100 per unit and a variable cost of Rs 75 per unit, and a defaulting customer pays nothing. Ignoring time value and collection costs, what is the expected profit per unit sold to this class?
The expected profit per unit is Rs 17. With an 8% default probability, expected collection is 92% of Rs 100, or Rs 92. The firm bears the full variable cost of Rs 75 whether or not the customer pays, so expected profit is 92 minus 75, which equals Rs 17.
- ARs 17Correct
- BRs 25
- CRs 8
- DRs 9.00
Explanation
If paid (92%), the firm gets Rs 100 and bears Rs 75 cost. Expected revenue = 0.92 x 100 = Rs 92. Expected profit = 92 - 75 = Rs 17. Rs 25 ignores default, and Rs 9 is wrongly 8% of 100 minus... not matching the data.
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