Three years ago, Trevor and Jill Davey formed a company called The Bicycle Boutique?

Sales have slowly increased each year, and the reputation of the company in the community has steadily improved. However, because of limited resources, the company has made only cash sales. With the increase in the prices for modern sophisticated bikes, the Daveys have decided that it would be desirable to offer credit card sales and to sell on credit.

Sales for the last three years have been $100,000, $140,000, and $190,000, respectively. The gross profit has consistently been 40% of sales. The Daveys believe that sales would increase by 50% next year if the “cash only” sales policy is not changed but would double under the new policy. They expect only 30% of the sales to be cash sales, with the remaining sales to be equally split between credit card sales and credit sales. The credit card receipts will be deposited immediately in a local bank. The fee on credit card sales will be 4%. It is expected that credit sales will be made evenly throughout the year, will be collected on average after two months, and that 2% will not be collectible.

To implement the new policy regarding credit sales, the company has applied for a bank loan of $150,000, to be paid back in one year. The bank will charge interest of 12%

and has asked for certain financial information.

Required: (1) Prepare a schedule that shows the cash receipts expected for the next year under the old policy and under the new policy.

(2) Should the company prefer credit card sales or credit sales?

(3) Should the company implement the new policy?

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