Question

The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.5 percent per period. Current Policy New Policy Price per unit $ 59 $ 61 Cost per unit $ 33 $ 33 Unit sales per month 2,450 ? What is the break-even quantity for the new credit policy? Break-even quantity

Answer 1

Profit Due to old Policy in one month sales
Sales Price			59
Cost Per Unit			33
Profit per unit			26
Sales			2450
Total Profit			63700
Let Sales in new policy be x
Sales Price			61
Cost Per Unit			33
Profit per unit			28
Sales			x
Total Profit			28x
Opportunity Cost
Cost per unit		33
Sales Unit		x
Total Cost		33x
Interest		2.50%
Opportunity Cost		33x*2.50%	=	0.825x
There fore For Break even sales
28x - 0.825x	=	67300
27.175x	=	67300
Therefore X =		67300/27.175		2476.541	Units

Break even quantity is 2746.541 means 2747 units