Question

Microbiotics currently sells all of its frozen dinners cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $70, and the cost per carton is $50. The unit sales will increase from 1,020 cartons to 1,080 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.

a. If the interest rate is 1% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If the interest rate is 1.5% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. Assume the interest rate is 1.5% per month but the firm can offer the credit only as a special deal to new customers, while existing customers will continue to pay cash on delivery. What will be the change in the firm's total monthly profits on a present value basis under these conditions? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Change in total monthly profit Change in total monthly profit Change in total monthly profit

Answer 1

solution: Profit if cash on delive PV of sale price per unit- 70.00 Less: Cost per unit 50.00 Profit per unit 20.00 x unit sold 1,020.00 monthly profit 20,400.00 Part a: 1% interest rate Part c: 1.5% interest rate PV of sale price per unit-70/1.01 Less Cost per unit 69.31 PV of sale price per unit-70/1.015 68.97 50.00 Less Cost per unit 50.00 Profit per unit Profit per unit 19.31 18.97 x incremental units (1080-1020) x unit sold 1,080.00 60.00 monthly profit change in total monthly profit 20,851.49 1,137.93 Hence change in total monthly profit 451.49 (20851.49-20400) Part b: 1.5% interest rate PV of sale price per unit-70/1.015 68.97 Less Cost per unit 50.00 Profit per unit 18.97 x unit sold 1,080.00 monthly profit 20,482.76 Hence change in total monthly profit 20482,76-20400) 82.76