Balboa Enterprises currently sells 13,650 units a month for total monthly sales of $272,863.50. The company is considering replacing its current cash only credit policy with a net 30 policy. The
Variable cost per unit is $11.30 and the monthly interest rate is 1 percent. What is the switch break-
Even level of sales?

Question

Quizplus · Accepted Answer

To calculate the switch break-even level of sales, we need to find the point where the incremental profit from the credit policy change equals the incremental cost.

Incremental profit per unit = (Price per unit - Variable cost per unit) x (1 - Monthly interest rate) 
= ($19.99 - $11.30) x (1 - 0.01) 
= $8.59 x 0.99 
= $8.50

Incremental cost per unit = Monthly interest rate x Price per unit 
= 0.01 x $19.99 
= $0.20

So, the incremental profit per unit is $8.50 and the incremental cost per unit is $0.20.

To find the switch break-even level of sales, we can use the formula:

Fixed cost / (Incremental profit per unit - Incremental cost per unit)

Substituting the given values, we get:

$272,863.50 / ($8.50 - $0.20) = 33,232 units

However, this is the break-even level of sales for the entire month. To find the switch break-even level of sales per day, we need to divide this by the number of days in a month:

33,232 units / 30 days = 1,107.73 units per day

Finally, we subtract the current sales volume of 13,650 units from this to find the incremental sales volume needed to break even:

1,107.73 units per day - 13,650 units = -12,542.27 units

This is a negative number, which means that the company would need to sell fewer units under the net 30 policy to break even compared to its current cash-only policy.

However, we need to make sure this result makes sense. The negative answer might seem counterintuitive, but it's possible because the incremental profit per unit is much larger than the incremental cost per unit. To further check, we can also calculate the incremental revenue from the credit policy change:

Incremental revenue per unit = Price per unit x Monthly interest rate 
= $19.99 x 0.01 
= $0.20

Incremental revenue per day = Incremental revenue per unit x Current sales volume / 30 
= $0.20 x 13,650 / 30 
= $91.00

This means that the company would earn an additional $91.00 per day from the credit policy change, which should help cover the additional costs from the interest charges.

Therefore, the best choice would be D, 13,968 units.

Balboa Enterprises Currently Sells 13,650 Units a Month for Total