Preston Milled products currently sells a product with a variable cost per unit

Question

Preston Milled products currently sells a product with a variable cost per unit of $21.75 and a unit selling price of $39.75. At the present time, the firm only sells on a cash basis with monthly sales of 330 units. The monthly interest rate is 1.1 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.

345 units

342 units

343 units

338 units

341 units

Preston Milled products currently sells a product with a variable cost per unit of $21.75 and a unit selling price of $39.75. At the present time, the firm only sells on a cash basis with monthly sales of 330 units. The monthly interest rate is 1.1 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.

Explanation / Answer

Cash Contribution per unit = Unit Selling Price - Unit Variable cost = $(39.75 - 21.75) = $18 per unit

Net 30 credit policy means the customer has to make payment by 30 days, from date of sales.

Since monthly interest rate is 1.1%, if cash Sales price is $100, a Net 30 credit payment will mean that Present Value of $100 that Preston receives at end of 30 days, is $100 / 1.011 = $98.912

Current monthly contribution (Based on Cash sales) = Unit Contribution (in $) x Number of units sold

= $18 x 330 = $5940

To break-even with credit sales, Total monthly contribution should equal $5940.

Let the number of break-even unit be Z.

Then,

[(Unit Selling Price / 1.011) x Number of Units Sold] - (Unit Variable Cost x Number of Units Sold) = $5940

Or,

$[(39.75 / 1.011) x Z] - ($21.75 x Z) = $5940

Solving, Z = 338 units.

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