Under its current cash sales only policy, JJ's sells 186 units a month at a price of $330 each. The variable cost per unit is $155 and the monthly interest rate is 1.3 percent. The firm believes it can sell an additional 25 units per month if it offers a net 30 credit policy. What is the present value of the switch using the one-shot approach?
A) $312,806
B) $291,543
C) $271,283
D) $288,946
E) $311,118

Question

Quizplus · Accepted Answer

To calculate the present value of the switch using the one-shot approach, we need to find the present value of the additional revenue from the credit sales, the present value of the additional cost from the credit sales, and the present value of the additional interest expense from the credit sales.

Additional revenue from credit sales:
25 units x $330 = $8,250
PV = $8,250 / (1 + 0.013) = $8,140.59

Additional cost from credit sales:
25 units x $155 = $3,875
PV = $3,875 / (1 + 0.013) = $3,827.09

Additional interest expense from credit sales:
Average accounts receivable = (0 + 30) / 2 = 15 days
Interest expense = ($8,250 / 30 days) x (15 days / 365 days) x 0.013 = $0.68
PV = $0.68 / (1 + 0.013) = $0.67

Present value of the switch = PV of additional revenue - PV of additional cost - PV of additional interest expense
Present value of the switch = $8,140.59 - $3,827.09 - $0.67 = $4,312.83

Therefore, the best choice is C, as it is the closest to the calculation result.

Under Its Current Cash Sales Only Policy, JJ's Sells 186