Charleston Enterprises currently sells 15,600 units a month for total monthly sales of $445,000. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $13.21 and the monthly interest rate is 1.5 percent. What is the switch break-even point?

Question

Quizplus · Accepted Answer

To find the break-even point for the switch to a net 30 policy, we need to calculate the number of units that must be sold to cover the additional costs incurred from the policy change. The additional costs come from the interest on the sales made on credit and any potential increase in variable costs due to higher sales volume.First, calculate the current average selling price per unit: $445,000 / 15,600 units = $28.53 per unit.The contribution margin per unit is the selling price per unit minus the variable cost per unit: $28.53 - $13.21 = $15.32.The monthly interest cost on the entire sales (assuming all sales are on credit under the new policy) is 1.5% of $445,000 = $6,675.To find the break-even point in terms of additional units that need to be sold to cover this interest cost, divide the monthly interest cost by the contribution margin per unit: $6,675 / $15.32 ≈ 435.7 units.Adding these additional units to the current sales volume to find the break-even point: 15,600 units + 436 units = 16,036 units. The closest option to this calculated value is 16,042 units.

Charleston Enterprises Currently Sells 15,600 Units a Month for Total