Microbiotics currently sells all of its frozen dinners cash on delivery but beli
ID: 2773996 • 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 $60, and the cost per carton is $45. The unit sales will increase from 1,160 cartons to 1,220 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 to 2 decimal places).
b. If the interest rate is 1.5% , 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 to 2 decimal places.)
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.)
Explanation / Answer
a I month Credit offered interst 1% Cash Flow PV 1% Present value =1220*-45 -54900.00 1.00 -54900.00 =1220*60 73200.00 0.99 72475.25 Present value Of Profit 17575.25 Current Profit =(60-45)*1160 17400.00 Change In profit iNcrease in Profit 175.25 b I month Credit offered Cash Flow PV 1.5% Present value =1220*-45 -54900.00 1.00 -54900.00 =1220*60 73200.00 0.99 72118.23 Present value Of Profit 17218.23 Current Profit =(60-45)*1160 17400.00 Change In profit Decrese in Profit -181.77 c I month Credit offered Cash Flow PV 1.5% Present value -54900.00 1.00 -54900.00 =1160*60 old Customer 69600.00 1.00 69600.00 =60*60 New Customer 3600.00 0.99 3546.80 Present value Of Profit 18246.80 Current Profit =(60-45)*1160 17400.00 Change In profitIncrease in Profit 846.80