New Products currently sells a product with a variable cost per unit of $23 and a unit selling price of $49. At the present time, the firm only sells on a cash basis with monthly sales of 733 units. The monthly interest rate is .48 percent. What is the value of Q' at the switch break-even point if the firm adopted a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.
A) 739.66 units
B) 736.34 units
C) 728.47 units
D) 740.29 units
E) 743.18 units

Question

Quizplus · Accepted Answer

The correct answer is A because the switch break-even point is the point at which the firm is indifferent between selling on a cash basis and selling on a net 30 credit policy. At this point, the present value of the cash inflows from the cash sales is equal to the present value of the cash inflows from the credit sales. The present value of the cash inflows from the cash sales is simply the selling price per unit multiplied by the number of units sold. The present value of the cash inflows from the credit sales is the selling price per unit multiplied by the number of units sold multiplied by the present value factor for 30 days at a monthly interest rate of .48 percent. The present value factor for 30 days at a monthly interest rate of .48 percent is 0.9952. Therefore, the switch break-even point is:49 * Q = 49 * 733 * 0.9952Q = 739.66 units

New Products Currently Sells a Product with a Variable Cost