Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a pound.The variable cost per pound is $2.22.Currently,the firm has a cash-only sales policy.The firm is considering changing to a net 30 credit policy.The monthly required return is 1.2 percent.What does the new level of sales need to be to break even on the switch?

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per pound, which is the revenue per pound minus the variable cost per pound:
Contribution margin per pound = $2.90 - $2.22 = $0.68

Under the current cash-only sales policy, the firm's total contribution margin per month is:
3200 pounds * $0.68/pound = $2,176

Under the new net 30 credit policy, the firm will need to cover the cost of financing the credit, which is equivalent to the monthly required return of 1.2 percent:
Financing cost per month = $2,176 * 1.2% = $26.11

To break even on the switch, the increase in sales volume must cover the financing cost:
Increase in sales volume = $26.11 / $0.68/pound = 38.39 pounds

Therefore, the new level of sales need to be:
3200 + 38.39 = 3,370.44 pounds

The answer is C).

Assume Atlantic Fish Sells 3,200 Pounds of Fish Per Month