Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2400947 • Letter: M
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 $130, and the cost per carton is $80. The unit sales will increase from 1,080 cartons to 1140 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.) Change in total monthly profit b. If the interest rate is 15% 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.) Change in total monthly profn 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 wil continue to pay cash on delilvery. What will be the change in the firm's total monthly profits on a present value besis under these conditions? (Do not round intermediate caiculetions. Round your answer to 2 decimal places) Change in total monthly profitExplanation / Answer
a PV of cash on delivery Sale = $130-$80 = $50 PER CARTOON Under the present cash on delivery policy, unit sales equals 1080 cartoon per month: $50 per cartoon * 1080 cartoon = $54000 If credit is extended, sales increases but present value per cartoon decreases to : PV of revenue = ($130/1.01)-80 = $48.71 per cartoon $48.71*1140 cartoon = $55529.40 The higher sales make up for the time value cost of the credit extended b If the int. rate is 1.5%, PV per cartoon decreases to: PV of revenue = ($130/1.015)-80 = $48.08 per cartoon $48.08*1140 cartoon = $55811.20 At the higher intt rate , the higher sales no longer are enough to make up for the cost of credit extended c The PV of old customers remains unaffected. The PV of new customers is positive. The additional gain earned by offering credit is 60 cartoons The profit margin (in presentvalue terms)is: = ($130/1.015)-$105 = $48.08 per cartoon.