PV of
profit
s
PV(REV – COST) × Units
=
sold
=($60 – 45) × 1,010
=$15,150
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 1,010 cartons to 1,070 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.)
Explanation
a.
1 month credit at an interest rate of 1% per month on all sales:
Some values below may show as rounded for display purposes, though unrounded
numbers should be used for the actual calculations.
Present cash on delivery profit:
At an interest rate of 1%, the offer of credit for one month increases the firm’s profits.
b.
1 month credit at an interest rate of 1.5% per month on all sales:
At an interest rate of 1.5%, the offer of credit for one month decreases the firm’s profits.
c.
1 month credit at an interest rate of 1.5% per month for new customers only:
PV of
profits
ΔPV of
profits
ΔPV of
profits
PV of PV(REV – COST) × Units
=
profits sold {[$60 / (1 + .01)] – $45}
=
× 1,070
=$15,414.36
Change in monthly $15,414.36 –
=
profits 15,150
=$264.36
PV(REV – COST) × Units
=
sold
{[$60 / (1 + 0.015)] – $45}
=
× 1,070
=$15,101.23
$15,101.23 –
=
15,150
=–$48.77
PV(REV – COST) × Units sold
=
Units soldNew
+ PV(REV – COST) ×
Original
