Ripley Shirt Company sells on credit and manages its own receivables. Average experience for the past 3 years has been as follows:
|
Cash |
Credit |
Total |
|
|
Sales |
$300,000 |
$300,000 |
$600,000 |
|
Cost of goods sold |
165,000 |
165,000 |
330,000 |
|
Uncollectible account expense |
— |
10,000 |
10,000 |
|
Other expenses |
84,000 |
84,000 |
168,000 |
John Ripley, the owner, is considering whether to accept bankcards (VISA, MasterCard). Ripley expects total sales to increase by 10% but cash sales to remain unchanged. If Ripley switches to bankcards, the business can save $8,000 on other expenses, but VISA and MasterCard charge 2% on bankcard sales. Ripley figures that the increase in sales will be due to the increased volume of bankcard sales.
Required
Should Ripley Shirt Company start selling on bankcards? Show the computations of net income under the present plan and under the bankcard plan. (Challenge)