Question

Aaron’s Home Furnishings has a cash only credit policy. Its current sales are 340 units per month at an average price per unit of $1,850. The variable cost per unit averages $840. How many additional units per month must the firm sell to breakeven on a switch to a 30-day credit policy? The interest rate per month is .4 percent.

2.50 units

22.22 units

6.75 units

18.69 unit

Answer 1

contribution = units sold (selling price per unit - variable cost per unit)

Present contribution = 340 x (1850 -840) = $343400

now company wants to give 30 days credit

so cost of investment in debtors have to be found out, which is equal to

= (sales in units per month) x (selling price per unit) x interest rate per month

= (X) x (1850) x (0.4%) = 7.4 X

now to make break even between the 2 policies,

the contribution of cash only credit policy = the contribution of 30 days credit policy - cost of investment in debtors

343400 = (X)(1010) - 7.4 X

solving X = 342.50 units

so to break even between the two policies, additional 2.50 units to be sold (342.5-340)

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