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Preston Milled products currently sells a product with a variable cost per unit of $16 and...

Preston Milled products currently sells a product with a variable cost per unit of $16 and a unit selling price of $41. At the present time, the firm only sells on a cash basis with monthly sales of 400 units. The monthly interest rate is 1.2 percent. What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant

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Answer #1

Cash Contribution per unit = Unit Selling Price - Unit Variable cost = $(41 - 16) = $25 per unit

Net 30 credit policy

Current monthly contribution (Based on Cash sales) = Unit Contribution (in $) x Number of units sold

= $25 x 400 = $10,000

To break-even with credit sales, Total monthly contribution should equal 10000

number of break-even unit be Z.

[(Unit Selling Price / 1.012) x Number of Units Sold] - (Unit Variable Cost x Number of Units Sold) = $10000

$[(41/ 1.012) x Z] - ($16 x Z) = $10000

Z = 408 units

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