The Snedecker Corporation is considering a change in its cash-only policy. The n

Question

The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. Based on the following information, what is the break-even price per unit that should be charged under the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current Policy $ 84 $ 44 4,100 New Policy Price per unit Cost per unit Unit sales per month $ 44 4,500 Break-even price

Explanation / Answer

Under the new credit policy, the amount will be received after one period rather than immediately as under the cash policy. Break even price would be the price at which present value of cash flows @ 2% under the credit policy would be equal to the cash flows under cash policy. Let us assume that the price under new policy is "p". The equation would be as follows -

Cash flows under Cash policy = cash flows under credit policy x PVF (2% , 1 period)

Or, 4100 x ($84 - $44) = 4500 x (p - $44) x 0.98039215686

Or, p - $44 = $37.17

Or, P = $81.17

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