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 $160, and the cost per carton is $95. The unit sales will increase from 1,110 cartons to 1,170 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? 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?

Answer 1

a.

PV of a cash-on-delivery sale = Selling price - cost

= $160 ? $95 = $65 per carton

Under the present cash-on-delivery policy,

unit sales equal 1,110 cartons per month

Sales = $65 per carton × 1,110 cartons = $72,150

If credit is extended,

sales increase, but present value per carton decreases to:

PV of revenue ? cost =$160 / 1.01 ? $95 = $63.416 per carton

Under the credit policy,

unit sales equal 1,170 cartons per month

Sales = $63.416 per carton × 1,170 cartons = $74,196

Change in monthly profits = $74,196 - $72,150 = $2,046

Due to cerdit policy profit increased by $2,046.

b.

If credit is extended,

sales increase, but present value per carton decreases to:

PV of revenue ? cost =$160 / 1.015 ? $95 = $62.635 per carton

Under the credit policy,

unit sales equal 1,170 cartons per month

Sales = $62.635 per carton × 1,170 cartons = $73,283

Change in monthly profits = $73,283 - $72,150 = $1,133

Due to cerdit policy profit increased by $1,133.

c.

If credit is extended to new customers only,

sales increase, but present value per carton decreases to for new customers:

PV of revenue ? cost =$160 / 1.015 ? $95 = $62.635 per carton

Under this policy,

Sales = $65 per carton × 1,110 cartons + $62.635 per carton × (1,170 - 1,110) cartons = $75,908

Change in monthly profits = $75,908 - $72,150 = $3,758

Due to cerdit policy profit increased by $3,758