Explore BrainMass

Extending Credit

28.5 The Theodore Bruin Corporation , a manufacturer of high-quality stuffed animals, does not extend credit to its customers. A study has shown that, by offering credit, the company can increase sales from the current 750 units to 1,000 units.

The cost per unit, however, will increase from $43 to $45, reflecting the expense of managing accounts receivable.The current price of a toy is $48. The probability of a customer making a payment on a credit sale is 92 percent, and the appropriate discount rate is 2.7 percent. By how much should Theodore Bruin increase the price to make offering credit an attractive strategy

Solution Preview

To calculate the desired new price, we must analyze the current situation:

Current Sales=750 units * $48 each= $36,000
Current Costs=750 units * $43 each= $32,250
Total Current Profit================$3,750

If the appropriate discount rate is 2.7%, this means interested parties would demand 2.7% interest above and beyond the current profit of $3,750 to be willing to wait for payment. 2.7% on top of $3,750 profit is ...

Solution Summary

The problem details what pricing strategy would likely benefit a firm considering offering credit to its customers for the first time and calculates the necessary changes to make the extension a profitable venture given various statistics.