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 $100, and the cost per carton is $65. The unit sales will increase from 1,050 cartons to 1,110 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?
b. If the interest rate is 1.5% per month v/hat will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers?
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?

Answer 1

Answer:

Following are the responses to the given question:

Explanation:

$\text{Present value of profit} = ( Revenue - cost ) \times Unit\ sold$

                                   $= (\ 100 - \ 65 ) \times 1,050\\\\= (\ 35 ) \times 1,050\\\\= \ 36,750$

For point a:

$\text{PV of profits} = PV(REV -COST) \times Units \ sold$

                     $= (\frac{\ 100}{ (1 + .01)} - \ 65) \times 1,110\\\\= (\frac{\ 100}{ (1 .01)} - \ 65) \times 1,110\\\\= (99.0 -65) \times 1,110\\\\= 34\times 1,110\\\\= \ 37,740$

Changes in monthly profits:

$= \ 37,740 - \ 36,570 = \ 1,170$

At 1%, the credit offer raises the company's earnings for one month.

 For point b:

$\text{PV of profits} = PV(REV -COST) \times Units \ sold$

$=(\frac{\ 100}{(1 + .015)} -\ 65) \times 1,110\\\\=(\frac{\ 100}{(1.015)} -\ 65) \times 1,110\\\\=33.52\times 1,110\\\\= 37,207.2$

  Changes in monthly profits:  

$= \ 37,207.2- \ 36,570 = 637.2.$

At 1.5%, the loan offering raises the company's earnings for one month.

For point c:

$\text{PV of profits} = PV(REV -COST) \times Units \ sold$

                     $= (\ 100 - \ 65 ) \times 60\\\\ = \ 2,100$

$\text{PV of profits} = PV(REV -COST) \times Units \ sold$  

                     $= (\frac{\ 100}{(1 + .015)} - \ 65) \times 60\\\\= (\frac{\ 100}{(1.015)} - \ 65) \times 60\\\\=33.52 \times 60\\\\= 2011.2$

Changes in monthly profits:

$= \ 2,011.2 -\ 2,100 = \ 88.8$

At a cost of 1.5%, the credit rates decrease the company's income for one month.