Question

The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. Based on the following information, what is the break-even price per unit that should be charged under the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per unit Cost per unit Unit sales per month Current Policy $ 84 $ 44 4,100 New Policy $ 44 4,500 Break-even price

Answer 1

Solution:

The values provided in the question are as follows:

Required rate of return per period = 2.0 % or 0.02

Cost per unit same in both Current Policy as well as New Policy = $ 44

Current Policy

Price per Unit = $84

Current policy sales per month = 4100 units

New Policy

Price per Unit = ?

New Policy sales per month = 4500 units

Break-Even Price per unit under new policy =?

Using the values provided in the question,

Contribution Margin = ( Price per Unit - Cost per unit ) * Current sales per month

Contribution Margin = ( $84 - $44 ) *4100

Contribution Margin = $ 40 *4100

Contribution Margin = $ 164,000

Break-Even Price is situation where there is no profit and no loss .It means that it covers all expenses i.e manufacturing and selling and distribution expenses .

Calculation of break-even price:

Let the selling price per unit under the new policy be x.

Contribution Margin = New Sales * (New selling price –cost price – Required return )

$164,000=4500 units * ( x- $44 – (0.02 x )

$ 164,000 =4500 * (0.98 x - $ 44 )

$ 164,000 =4410 x - $ 198,000

$ 164,000 + $ 198,000 = 4410 x

$ 362,000 =4410 x

x= $362,000/ 4410

x=82.09

Break-Even Price per unit under new policy =82.09