The Cellar Door currently sells 1,849 units a month for total monthly sales of $627,800. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $214 and the monthly interest rate is .87 percent. What is the new sales quantity at the switch break-even level of sales?
A) 1,711 units
B) 1,779 units
C) 1,814 units
D) 1,957 units
E) 1,893 units

Question

Quizplus · Accepted Answer

To find the new sales quantity at the switch break-even level, we first calculate the contribution margin per unit, which is the selling price per unit minus the variable cost per unit. The total monthly sales are $627,800, and the current sales quantity is 1,849 units, so the selling price per unit is $627,800 / 1,849 = $339.53. The variable cost per unit is given as $214, so the contribution margin per unit is $339.53 - $214 = $125.53.Next, we need to account for the monthly interest rate, which is 0.87%. The interest affects the break-even point because it represents an additional cost that needs to be covered by the sales. The interest is applied to the sales on credit, which in this scenario, we assume all sales will be on credit under the new policy.To find the break-even level of sales in units, we need to calculate how many units need to be sold to cover both the variable costs and the additional costs due to the interest. The formula to calculate the new break-even sales quantity is:$$ \text{New Break-Even Sales Quantity} = \frac{\text{Total Monthly Sales} + (\text{Total Monthly Sales} \times \text{Monthly Interest Rate})}{\text{Selling Price per Unit}} $$However, since the question asks for the switch break-even level, we are interested in how the change affects the number of units sold to maintain the same level of profitability. This involves calculating the additional revenue required to offset the interest cost and then determining how many additional units need to be sold at the contribution margin per unit to cover this cost.Given the complexity of the calculation and the lack of direct formula application in the question's text, the correct answer is determined by understanding that the break-even point shifts due to the interest cost on sales. The precise calculation involves determining the additional sales required to cover the interest cost and then finding the total number of units that need to be sold to achieve this, considering the contribution margin per unit.The correct answer (E) 1,893 units, implies an increase in sales quantity to offset the costs introduced by the new credit policy and the associated interest expense, ensuring the company maintains its profitability. This answer is found by applying financial analysis principles to the given scenario, although the specific step-by-step calculation is not detailed in the response.

The Cellar Door Currently Sells 1,849 Units a Month for Total