Question

You have been pricing an MP3 player in several stores. Three stores have the identical price of $300. Each store charges 24 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the MP3 player on May 5 and made a $100 payment on June 15.

What will the finance charge be if you made your purchase from:

a. store A?
b. store B?
c. store C?

Answer 1

Answer:

a. $5

b. $4

c. $6

Explanation:

a. store A?

Beginning balance = $300

Ending balance = $300 - $100 = $200

Average balance = ($300 + $200) ÷ 2 = $250

Monthly APR = 24% ÷ 12 = 2%

June finance charge = Average balance × Monthly APR = $250 × 2% = $5

b. store B

June finance charge = (Beginning balance - Payments) × Monthly APR = ($300 - $100) × 2% = $4

c. store C?

June finance charge = Beginning balance × Monthly APR = $300 × 2% = $6