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. Based on the following information, what is the break-even price per unit that should be charged under the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

    

	Current Policy			New Policy
Price per unit	$	56			?
Cost per unit	$	32		$	32
Unit sales per month		2,300			2,600

  

Break-even price

$

Answer 1

Break even price would be the price at which the contribution under both the current policy and the new policy would be equal.

Current Policy : Contribution = (Sales price per unit - variable cost per unit) x no. of units sold = ($56 - $32) x 2300 = $55,200

Let the break-even sales price be "P".

Now, Contribution under new policy = Contribution under old policy

or, (Sales price per unit - variable cost per unit - interest cost per unit) x no. of units sold = $55200

or, (P - $32 - 2% x P) x 2600 = $55200

or, (0.98 P - $47) x 2600 = $55200

or, P = $69.62

Therefore, break - even price is $69.62.