Sawyer's currently sells 70 units per month at a price of $412.50 a unit. The firm is considering switching to a 30 day credit policy with a credit sales price of $429.69 a unit and a cash price of $412.50. The monthly interest rate is 1.17 percent. What is the break-even default rate of the proposed switch?
A) 2.88 percent
B) 3.68 percent
C) 3.19 percent
D) 2.71 percent
E) 3.06 percent

Question

Quizplus · Accepted Answer

The break-even default rate is the rate at which the firm would be indifferent between the two pricing policies. At this rate, the firm would earn the same amount of revenue under either policy.To calculate the break-even default rate, we can use the following formula:```Break-even default rate = (Credit sales price - Cash price) / (Credit sales price * Monthly interest rate)```Plugging in the given values, we get:```Break-even default rate = ($429.69 - $412.50) / ($429.69 * 0.0117) = 2.88%```Therefore, the break-even default rate is 2.88%.

Sawyer's Currently Sells 70 Units Per Month at a Price