Decision to extend credit to a new class of customers. The Nordstrom's store several miles from the University of Washington campus has a gross margin on credit sales of 30 percent; that is, cost of goods sold on account is 70 percent of sales on account. Uncollectible accounts amount to 2 percent of credit sales. If the firm extends credit to a group of new student customers, credit sales will increase by

\(\$ 10,000,7\) percent of the new credit sales will be uncollectible, and all other costs, including interest to finance extra inventories, will increase by \(\$ 1,100\).

a. Would Nordstrom's be better or worse off if it extended credit to the new class of customers, and by how much?

b. How would your answer to part a differ if \(\$ 3,000\) of the \(\$ 10,000\) increase in credit sales would have been made anyway as sales for cash? (Assume that the uncollectible amount on new credit sales is \(\$ 800\) and that all other costs increase by \(\$ 750\).