Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2755174 • 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 $120, and the cost per carton is $75. The unit sales will increase from 1,070 cartons to 1,130 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 $120, and the cost per carton is $75. The unit sales will increase from 1,070 cartons to 1,130 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.
Explanation / Answer
Answer for question no.a:
Price per carton =$120.
Cost per carton=$75.
Profit per carton=$120-$75
=$45.
Increase in sales in cartons=60 cartons.
Increase in profit =$45*60 cartons
=$2,700.------------(X)
Sales proceeds for the entire sales =$135,600.------------(A)
Present value factor @1% per month.=0.990099
Therefore present value of collections =0.990099*$135,600
=$134,257.4.--------(B)
Decrase in present value of sale proceeds = (A) - (B)
=$1342.57.-----------(Y)
Decrease in profits= X-Y
=$2,700 - $1342.57
=$1,357.43.
Answer for question no.b:
Present value factor @1.5% per month.=0.985222.
Therefore present value of change in profits =0.985222.*$135,600
=$133,596.1---------(B)
Decrase in present value of sale proceeds = (A) - (B)
=$2,003.94------(Y)
Decrease in profits= X-Y
=$2,700 - $2,003.94
=$696.06.
Answer for question no.c:
In case only new customers are offered credit, then the additional profit earned is as follows:
Increase in sales in cartons=60 cartons.
Increase in profit =$45*60 cartons
=$2,700.
Collections from new customers in case collected with out offering credit =60 carton*120 per carton
=$7,200.
Present value of increasee in collections =Present value factor @1,5% per month * $7,200
=$7,093.
Incremental profit in case only new customers are allowed credit of one month =$2,700 - ($7,200 -$7,093.)
=$2,700 - $106.40
=$2,593.60.