Question

You have been pricing an MP3 player in several stores. Three stores have the identical price of $400. Each store charges 12 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the MP3 player on May 5 and made a $100 payment on June 15.

What will the finance charge for June be if you made your purchase from store A? From store B? From store C? (Do not round intermediate calculations. Round your answers to 2 decimal places

Finance charge

store A =

store B=

store C=

Answer 1

Ans:- It is given in the question that three stores have the identical price of $ MP3 i.e 400 and each store charges 12% APR(Annual Percentage Rate) and has a grace period of 30 days. we need to find the finance charges for June from store A, B, and C.

Note:- 12% APR(Annual Percentage Rate) in monthly interest rate will be 12%/12 = 1% or 0.01.

(a) Finance charges for store A if it is using the Average Daily Balance Method.

Average Daily Balance is ($400 + $300)/2 =$350.

Now the Finance charges for store A will be given by Average Daily Balance* Monthly Interest rates = $350*0.01= $3.5.

(b) Finance charges for store B if it uses Adjusted Balance Method.

Adjusted Balance is ($400-$100) = $300.

Finance Charge for store B is Adjusted Balance * Monthly charges = $300* 0.01 =$3.

(c) Finance charges for store C if it uses the Previous Balance Method.

Previous Balance will be $400 - $0 = $400.

Finance charges for store C will be Previous Balance* Monthly Interest rates. = $400 * 0.01 = $4.

Note:- The store c charges the interest rate for the entire month on the beginning balance of $400 because it does not consider the amount paid during the month.