Cape May Products currently sells 487 units a month at a price of $79 a unit. The firm believes it can increase its sales by an additional 42 units if it switches to a net 30 credit policy. The monthly interest rate is .25 percent and the variable cost per unit is $31.50. What is the incremental cash inflow from the proposed credit policy switch?
A) $1,774
B) $1,995
C) $2,746
D) $3,318
E) $3,375

Question

Quizplus · Accepted Answer

First, calculate the current cash inflow per month.

487 units x $79 = $38,473

Next, calculate the additional units sold with the proposed credit policy.

42 units x $79 = $3,318

Then, calculate the incremental variable cost for the additional units sold.

42 units x $31.50 = $1,323

Using the net 30 credit policy, the firm would receive the $3,318 in the following month with a 0.25% interest charge.

$3,318 - ($3,318 x 0.0025) = $3,310

Therefore, the incremental cash inflow from the proposed credit policy switch is:

$3,310 - $1,323 = $1,987

Rounded to the nearest dollar, the answer is B) $1,995.

Cape May Products Currently Sells 487 Units a Month at a Price