Valley Clothing Shop is a small clothing retailer now in its fourth year of business. Through its
Question:
Plan 1 Offer qualified customers the opportunity to purchase merchandise on account. Valley believes this will create new credit sales of 18% of current cash sales. Increased expenses would include 4% of net credit sales related to bad debts, 2% of net credit sales for billing, and 1% of net credit sales for increased recordkeeping.
Plan 2 Begin accepting credit cards. Valley believes this will create new credit sales of 23% of current cash sales. Increased expenses would include 5.5% of net credit sales-related credit card fees and 0.5% of net credit sales for increased recordkeeping.
Required
a. Compute net income under each plan assuming a tax rate of 30%.
b. Which plan would you recommend Valley accept?
c. What other factors should Valley consider when evaluating these options?
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