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Extending Credit

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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

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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.

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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 ...

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