Thomas Metal Works produces specialty products which are sold to one-time customers. The variable cost per unit is $776 and the sales price per unit is $949. The monthly interest rate is 1 percent. Management believes that 10 percent of any credit sales will be uncollectible. The firm _____ grant credit because the net present value of a sale is _____.

Question

Quizplus · Accepted Answer

The net present value of a sale can be calculated by considering the sales price, variable cost, the percentage of sales expected to be uncollectible, and the monthly interest rate. Given a sales price of $949 and a variable cost of $776, the gross profit per unit is $173. If 10% of sales are uncollectible, then 90% of sales are collectible, making the expected collectible amount $949 * 0.9 = $854.1. The net profit after considering uncollectibles is $854.1 - $776 = $78.1. Discounting this amount by the monthly interest rate of 1% (or 0.01 when expressed as a decimal), the present value of the net profit is approximately $78.1 / (1 + 0.01) = $77.3267, which rounds to approximately $77. Since the option closest to this calculation is $70 and it suggests granting credit, option A is the correct choice.

Thomas Metal Works Produces Specialty Products Which Are Sold to One-Time