Reference no: EM133033748

Chip Davis has been running his car dealership business successfully for five years. This year, he started to suffer losses because some of his customers have defaulted on their payments. At the end of the third quarter of the year, the defaulters have increased and the losses have intensified so much that he decides to do something about it.

A consultant suggests that he offer a 5% discount for immediate payment, but Davis is not sure if that will solve the problem. He also wonders how much this discount will cost him in the end.

Davis' friend suggests to him that the offered discounts would be a bad idea because he knows of another business setup that used the discount policy, which ended in disaster. The company lost 5% of its revenue on those who would have paid promptly anyway, and those who did not intend to pay on time simply did not pay. This friend suggests decreasing the monthly installment but increasing the number of installments.

Davis also consulted his uncle, who has run several successful businesses, on this matter; the uncle suggests offering a 5% discount upfront on advance payments and this would give customers more incentive to pay. In addition, he suggests adding a penalty on defaulters who are behind on their payments by more than 30 days. If the defaulters do not pay within an additional 30 days, they could then be referred to a collection agency.

-Provide an assessment of the type of bias that applies to this scenario.