Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2487597 • 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 $180, and the cost per carton is $105. The unit sales will increase from 1,130 cartons to 1,190 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 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.) Change in total monthly profit $ 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.) Change in total monthly profit $
Explanation / Answer
at 1130 units the profit
=1130*(sp-cp)
=1130*(180-105)=$84,750
at 1190 units the profit
=1190*(180-105)
=$89,250
Since interest rate is 1% per month the value after interest deducted is
=89250/(1+1%)^(1/12)
=$89,175
Chnage in profit=89175-84750=$4426.025
b)If interets rate is 1.5%
=89250/(1+1.5%)^(1/12)
=$89,139
Chnage in profit=89139-84750=$4389.335
c)
for 1130 units it is 1130*(180-105)=84750
for other 60 units credit is given
=60*75=4500 and it has to be converted to present value
=4500/(1+1.5%)^(1/12)=$4494.42
total=84750+4494.2=$89,244.42
Difference=89244.42-84750=$4494.42