Here is a forecast of sales by National Bromide for the first 4 months of 2015 (figures in thousands of dollars):
On average, 50% of credit sales are paid for in the current month, 30% in the next month, and the remainder in the month after that. What are the expected cash collections in months 3 and 4? (Enter your answers in whole dollars.)
Microbiotics currently sells all of its frozen dinners cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $110, and the cost per carton is $70. The unit sales will increase from 1,060 cartons to 1,120 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.
a. If the interest rate is 1% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. If the interest rate is 1.5% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. Assume the interest rate is 1.5% per month but the firm can offer the credit only as a special deal to new customers, while existing customers will continue to pay cash on delivery. What will be the change in the firm's total monthly profits on a present value basis under these conditions? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
On each nondelinquent sale Cast Iron receives revenues with a present value of $1,370 and incurs costs with a present value of $1,220. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .95.
a-1. What is the expected profit of granting credit? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
a-2. Should Cast Iron grant or refuse credit?
Grant
Refuse
b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)