Optimal credit period and purchase quantity for credit dependent trended demand

Abstract

The seller offers its buyer a credit period to settle the account which attracts more buyers and boosts market demand. However, the offer of credit period leads to default risk for the supplier. In this study, the seller is the decision maker. The demand is considered to be increasing with time and is dependent of permissible trade credit. The default risk in incurring in sales revenue is incorporated in objective of profit maximization. The necessary and sufficient conditions to obtain the seller’s optimal decision about setting the permissible credit period and purchase quantity are discussed. A procedure to determine the optimal solution is outlined. Finally, the numerical example is given to illustrate the theoretical results and sensitivity analysis is carried out to deduce some managerial insights.