Happy Times currently has an all-cash credit policy. It is considering making a

Question

Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what is the break-even price per unit under the new credit policy? The required return is 0.88 percent per month. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what is the break-even price per unit under the new credit policy? The required return is 0.88 percent per month. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer:

Answer: At Breakeven point the NPV shall be zero:

Calculation of NPV:

Increase in Net Profit = Increase in units * (Sales Price – Cost)

=(1735 - 1680 )* (Sales Price - 178)

= Sales Price*55 - 9790

Financing cost for 1 month = 1735 Units *Sales Price *0.88% = 15.268 * Sales Price

Hence Net present value =

(Sales Price*55 - 9790) –(15.268 * Sales Price) = 0

(Sales Price*55 - 9790) = (15.268 * Sales Price)

(Sales Price*55 - 9790 –15.268 * Sales Price) = 0

Sales Price*39.732 - 9790 = 0

Sales Price = 9790 / 39.732

= $246.40

Hence Breakeven Sales Price   = $246.40

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