Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2754694 • 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 $110, and the cost per carton is $70. The unit sales will increase from 1,060 cartons to 1,120 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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 $110, and the cost per carton is $70. The unit sales will increase from 1,060 cartons to 1,120 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.
Explanation / Answer
Part A)
To calculate the change in total monthly profit, we need to calculate the present value of per carton after extension of credit to customers. The present value has been calculated as follows:
Present Value Per Carton = Current Selling Price/(1+Interest Rate) - Price Per Carton = 110/(1+1%) - 70 = $38.911 (that is the present value per carton decreases from $40 (110 - 70) to $38.911).
This decrease in present value per carton will however, result in an increase in unit sales from 1,060 to 1,120.
________
The change in the monthly profit can be calculated as follows:
Change in Monthly Profit = Revised Profit after Extension of Credit (Unit Sales after Extension*Present Value After Extension) - Current Profit (Unit Sales*Current Present Value)
Using the values calculated above and information provided in the question, we get,
Change in Total Monthly Profit = 1,120*38.911 - 1,060*40 = $1,180.20
_________
Part B)
To calculate the change in total monthly profit, we need to calculate the present value of per carton after extension of credit to customers. The present value has been calculated as follows:
Present Value Per Carton = Current Selling Price/(1+Interest Rate) - Price Per Carton = 110/(1+1.5%) - 70 = $38.375 (that is the present value per carton decreases from $40 (110 - 70) to $38.375).
This decrease in present value per carton will however, result in an increase in unit sales from 1,060 to 1,120.
________
The change in the monthly profit can be calculated as follows:
Change in Monthly Profit = Revised Profit after Extension of Credit (Unit Sales after Extension*Present Value After Extension) - Current Profit (Unit Sales*Current Present Value)
Using the values calculated above and information provided in the question, we get,
Change in Total Monthly Profit = 1,120*38.375 - 1,060*40 = $579.31 or $580
_________
Part C)
In the given case, the present value of old customers would continue to be $40 (110 - 70). The company would gain additional sales of 60 cartons (1,120 - 1.060) as a result of extending credit. The change in total monthly profit has been calculated as follows:
Change in Monthly Profit = Revised Profit after Extension of Credit (Unit Sales after Extension*Present Value After Extension) - Current Profit (Unit Sales*Current Present Value)
Using the present value calculated above in Part B and information provided in the question, we get,
Change in Total Monthly Profit = (60*38.375 + 1,060*40) - (1,060*40) = $2,302.46