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 0.80 percent per month. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) THE ANSWER IS NOT INCOMPLETE. YOU NEED TO FIGURE OUT THE NEW POLICY PRICE PER UNIT. THE QUESTION MARK IS NOT A MISTAKE

   

$

Current Policy New Policy   Price per unit $ 195 ?   Cost per unit $ 149 $ 153   Unit sales per month 1,440 1,480

Explanation / Answer

Net profit from current policy:

Net Profit = (Price – cost per unit) x unit sales per month

                    = (195-149) x 1440

                    = 66,240

PV of net profit from the new policy should be the same for breakeven:

PV of net profit = (Price – cost per unit) x unit sales per month / (1+r)

                66,240 = ( P -153) x 1480 / (1+0.008)

                66,769.92 = 1480 P- 226,440

                P = (66,769.92+226,440)/ 1480

                P = 198.11

Therefore, break even price would be 198.11.

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