7 Chapter 11 Case Study

Developing Product Payment Plans

The Situation

Lightning Wholesale works very closely with some of its smaller retailers, many of which are owned and operated by sole proprietors. These owners generally need assistance with their pricing and call on the staff at Lightning Wholesale to help develop promotional pricing plans and the amounts of the payments that can be advertised. Lightning Wholesale freely offers the help, since it means more sales and increased profits for the company.

Many of the requests are identical in nature, so the staff at Lightning Wholesale want to develop a payment plan chart for their ski product line. This chart is to illustrate both the three-month and six-month payment plan amounts that can be advertised at various interest rates.

The Data

• Lightning Wholesale has opted to only carry two ski brands in 2014: Ogasaka and Nordica.
• The list prices for Ogasaka and Nordica are $829.95 and $799.95, respectively.
• The typical monthly compounded interest rates charged by its retailers are 8%, 12%, 18%, and 28%.
• Lightning Wholesale recommends a 10% down payment on all finance plans for all of its retailers.

Important Information

• All retailers sell the skis at the list price.
• All ordinary payment plans are either three month or six month.
• Lightning Wholesale ignores sales taxes in its chart since every province has varying rates. The retailer can increase the payments in the payment chart by the appropriate sales tax.

 Your Tasks

1. For both product lines and for each interest rate, develop both a three-month and a six-month payment plan amount chart that the retailers can advertise that incorporates the required down payment. For these advertised amounts, assume the final payment remains the same as all other payments (in application, though, the retailers will need to be cautioned that the final payment may be different and adjusted as needed, to which Lightning Wholesale can provide the necessary information as required).
2. Retailers ask you how to adjust the advertised payment plan chart amounts if they decide to sell the skis for some price other than the list price. What would you recommend? Provide calculations to support your answer.
3. Some retailers charge different interest rates and want to know if it is possible to just proportionally adjust the payment plan chart. For example, if a retailer charges 25.5% interest, this approach would then be to increase the 18% payment by 75% of the difference between the 18% and 28% level. Can retailers adjust your payment plan table in this way? Provide calculations using the provided numbers to support your answer.
4. Some retailers offer up to 12-month payment plans and ask if it is possible to just take the three-month payment numbers and divide by 4, or take the six-month payment numbers and divide by 2 to arrive at the 12-month payment plan numbers. Can retailers adjust your payment plan table in this way? Provide calculations to support your answer.