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 $60, and the cost per carton is $45. The unit sales will increase from 1,160 cartons to 1,220 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.)

Answer 1

solution: Profit if cash on delivery PV of sale price per unit= 60.00 Less Cost per unit 45.00 Profit per unit 15.00 1,160.00 x unit sold monthly profit 17,400.00 Part a: 1% interest rate Part c: 1.5% interest rate PV of sale price per unit 60/1.01 Less Cost per unit PV of sale price per unit 60/1.015 59.11 59.41 45.00 45.00 Less Cost per unit Profit per unit x incremental uni ts (1220-1160) change in total monthly profit Profit per unit 14.41 14.11 x unit sold 1,220.00 60.00 monthly profit 17,575.25 846.80 Hence change in total monthly profit 175.25 (17575.25-17400) Part b: 1.5% interest rate PV of sale price per unit-60/1.015 Less Cost per unit 59.11 45.00 Profit per unit 14.11 unit sold 1,220.00 X monthly profit 17,218.23 Hence change in total monthly profit (17218.23-17400) 181.77