Question

The Iberia Tire Company has 3,000 tires in its inventory which are considered obsolete. Each tire originally cost the company $35 and the normal selling price was $45 per tire. Management is considering two options to reduce these inventory levels. Option one is to sell the tires directly to car dealerships for $30 per tire as opposed to the normal selling price of $45 per tire. The other option is to offer their current customers a $10 per tire rebate on their purchase. In addition to the $10 rebate, the program would cost the company approximately $24,000 to manage. They predict that either option will rid them completely of their excess The decision to sell directly to the car dealerships over offering the rebate will result in:_______
A. A $21,000 increase in profits.
B. A $9,000 increase in profits.
C. A $15,000 decrease in profits.
D. A $24,000 decrease in profits.

Answer 1

Answer:

B. A $9,000 increase in profits

Explanation:

Calculation to determine what The decision to sell directly to the car dealerships over offering the rebate will result in:

First step is to calculate the net selling prices for each group

Car dealership total price of sales = 3000 × 30 Car dealership total price of sales =$90,000

Current customers;

First step is to calculate the price of 1 tire

Price of 1 tire = $45 - $10 rebate

Price of 1 tire = $35

Total selling price = 35 × 3000

Total selling price= $105,000

Second step is to calculate net amount gotten from sales to customers

Net income= $105,000 - $24,000

Net income= $81,000

Now let calculate what the decision to sell directly to the car dealerships over offering the rebate will result in:

Decision to sell = 90,000 - 81,000

Decision to sell= $9,000 increase in profits

Therefore the decision to sell directly to the car dealerships over offering the rebate will result in:$9,000 increase in profits