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.

    

	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.)

Answer 1

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