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 $100, and the cost per carton is $65. The unit sales will increase from 1,200 cartons to 1,260 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

	Profit if cash on delivery
	Pv of sale price per unit	100
	Less: Cost per unit	65
	Profit per unit 35
	x unit sold	1,200
	monthly profit	42,000
	a.1% interest rate
	PV of sale price per unit =	(100/1.01 ) 101.01	99.01
	Less: Cost per unit		65
	Profit per unit		34.01
	x unit sold		1,260
	monthly profit		42,852.48
	Hence change in total monthly profit	(42,852.48-42,000)	852.48
	b.1.5% interest rate
	PV of sale price per unit (100/1.015) 98.52
	Less:Cost per unit		65
	Profit per unit 33.52
	x unit sold		1,260
	monthly profit		42,237.93
	Hence change in total monthly profit	(42237.92-42000)	237.93
	c. 1.5% interest rate
	PV of sale price per unit (100/1.015) 98.52
	Less: Cost per unit		65
	Profit per unit	33.52
	x incremental units (1,260-1,200)	60
	change in total monthly profit	2,011.33