Currently, your firm sells 440 units a month at a price of $90 a unit. You think you can increase your sales by an additional 200 units if you switch to a net 30 credit policy. The monthly interest rate is.7 percent and your variable cost per unit is $55. What is the incremental cash inflow of the proposed credit policy switch?
A) $7,000
B) $9,000
C) $11,000
D) $16,000
E) $18,000

Question

Quizplus · Accepted Answer

The incremental cash inflow is the difference between the cash inflow from the new credit policy and the cash inflow from the old credit policy. The cash inflow from the new credit policy is the sales revenue minus the variable cost minus the interest expense. The sales revenue is the number of units sold times the price per unit. The variable cost is the number of units sold times the variable cost per unit. The interest expense is the number of units sold times the price per unit times the monthly interest rate times the number of months in a year. The cash inflow from the old credit policy is the sales revenue minus the variable cost. The incremental cash inflow is the difference between these two cash inflows.The incremental cash inflow is $18,000.

Currently, Your Firm Sells 440 Units a Month at a Price