The Gardeners Co. currently sells 1,800 units a month for total monthly sales of $79,200. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $34 and the monthly interest rate is 1.7 percent. What is the switch break-even level of sales?

Question

Quizplus · Accepted Answer

The break-even level of sales can be calculated by determining the additional sales needed to cover the cost of financing the receivables. The current sales are $79,200, and the variable cost per unit is $34. The price per unit is $79,200 / 1,800 = $44. The contribution margin per unit is $44 - $34 = $10. The monthly interest rate is 1.7%, so the cost of financing the receivables for one month is 1.7% of $44, which is $0.748 per unit. To cover this cost, additional units need to be sold: $0.748 / $10 = 0.0748 units per original unit sold. Therefore, the break-even level of sales is 1,800 units * (1 + 0.0748) = 1,800 * 1.0748 = 1,934.64 units, which rounds to approximately 1,943 units.