Suzanne had a summer job working in the business office of Blast-It TV and Stereo, a local chain of home electronics stores. When Michael Jacobssen, the owner of the chain, heard she had completed one year of business courses, he asked Suzanne to calculate the profitability of two new large-screen TVs. He plans to offer a special payment plan for the two new models to attract customers to his stores. He wants to heavily promote the more profitable TV.
When Michael gave Suzanne the information about the two TVs, he told her to ignore all taxes when making her calculations. The cost of TV A to the company is $1950 and the cost of TV B to the company is $2160, after all trade discounts have been taken. The company plans to sell TV A for a $500 down payment and $230 per month for 12 months, beginning 1 month from the date of the purchase. The company plans to sell TV B for a $100 down payment and $260 per month for 18 months, beginning 1 month from the date of purchase. The monthly payments for both TVs reflect an interest rate of 15.5% compounded monthly.
Michael wants Suzanne to calculate the profit of TV A and TV B as a percent of the TV’s cost to the company. To calculate profit, Michael deducts overhead (which he calculates as 15% of cost) and the cost of the item from the selling price of the item. When he sells items that are paid for at a later time, he calculates the selling price as the cash value of the item. (Remember that cash value equals the down payment plus the present value of the periodic payments.)
Suzanne realized that she could calculate the profitability of each TV by using her knowledge of ordinary annuities. She went to work on her assignment to provide Michael with the information he requested.
QUESTIONS
1.(a) What is the cash value of TVA? Round your answer to the nearest dollar
(b) What is the cash value of TV B? Round your answer to the nearest dollar
2. (a) Given Michael’s system of calculations, how much overhead should be assigned to TV A?
(b) How much overhead should be assigned to TV B?
3.(a) AccordingtoMichael’ssystemofcalculations,whatistheprofitofTVAasa percent of its cost?
(b) What is the profit of TV B as a percent of its cost?
(c) Which TV should Suzanne recommend be more heavily promoted?
4. Three months later, due to Blast-It’s successful sales of TV A and TV B, the suppliers of each model gave the company new volume discounts. For TV A, Blast-It received a discount of 9% off its current cost, and for TV B one of 6%. The special payment plans for TV A and TV B will stay the same. Under these new conditions, which TV should Suzanne recommend be more heavily promoted?