Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2724613 • 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 1,140 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.
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.)
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.)
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?
Change in total monthly profit $
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.)
Explanation / Answer
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?
In original scenario,
Cost=80*1080
Sales= 130*1080
Profit= 1080*(130-80)
Profit= $54000
Now Interest is 1% per month and credit of 1 month is offered to all customers.
Sales= 1140*130
Cost=1140*80
Profit= 1140*(130-80)
Profit=57000
Profit on Present Value basis= 57000/(1+1%)= 56435.64
Change in Total monthly Profit= 56435.64-54000
Change in Total monthly Profit=$2435.64
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?
Interest is 1.5% per month and credit of 1 month is offered to all customers.
Sales= 1140*130
Cost=1140*80
Profit= 1140*(130-80)
Profit=57000
Profit on Present Value basis= 57000/(1+1.5%)= 56157.64
Change in Total monthly Profit= 56157.64-54000
Change in Total monthly Profit=$2157.64
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?
Interest is 1.5% per month and credit of 1 month is offered to all customers.
Sales= 1140*130
Cost=1140*80
Now Old customes will pay on COD but new customers will be offered credit. Thus 1080 customers will pay Cash on Delivery and remaining 60(1140-1080) will avail credit facility.
Profit from 60customers on PV basis= (60*(130-80))/(1+1.5%)
Profit from 60customers on PV basis=2955.67
Total Profit= Profit from 1080 customers + Profit from 60customers on PV basis
=54000+2955.67
Total Profit=56995.67
Change in Total monthly Profit= 56995.67-54000
Change in Total monthly Profit=$2955.67
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?