Question

Preston Milled products currently sells a product with a variable cost per unit of $21.50 and a unit selling price of $39.50. At the present time, the firm only sells on a cash basis with monthly sales of 320 units. The monthly interest rate is 1.2 percent. What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.

335 units

329 units

333 units

331 units

332 units

Answer 1

Solution:-

Let the breakeven point be X units. So, the new additional units would be (X-320).

As we can see that the sales price stays the same after offering 30 days credit period. So, essentially the business will face an increase in the interest expense to fund the additional working capital requirement.

Profit due to new additional units owing to new policy= (X-320)*($39.5-$21.5) = 18X-5,760

30-day interest expense due to investment in working capital= X*$39.5*1.2% = 0.474X

We know that at the breakeven point, both the benefits and cost would be equal. Thus,'

18X-5,760= 0.474X

X= 329 units

Thus, the correct option is the second option.