Question

# The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be...

 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.

 Current Policy New Policy Price per unit \$ 84 \$ 86 Cost per unit \$ 44 \$ 44 Unit sales per month 4,100 ?

 What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The cost of switching credit policies is:

Cost of new policy = −[PQ + Q(v′ − v) + v′(Q′ − Q)]

And the cash flow from switching, which is a perpetuity, is:

Cash flow from new policy = [Q′(P′ − v′) – Q(P − v)]

To find the break-even quantity sold for switching credit policies, we set the NPV equal to zero and solve for Q′.

Doing so, we find:NPV = 0 = −[(84)(4100) + (44)(Q′ − 4100)] + [(Q′)(86 − 44) − (4100)(84 − 44)] / .02

−344400 − 44Q′ + 180400 + 2100Q′ − 8200000 = 0

=> 2056Q′ = 8364000

Q′ = 4068.09

So, break even quantity = 4068.09

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