Question

Sherl Sandberg and Mark Zuckerberg of Facebook are introduced in the chapter's opening feature. Assume that they are considering two options.

Plan A.

Facebook would begin selling access to a premium version of its website. The new online customers would use their credit cards. The company has the capability of selling the premium service with no additional investment in hardware or software. Annual credit sales are expected to increase by $350,000.

Costs associated with Plan A: Additional wages related to these new sales are $236,200 credit card fees will be 4.75% of sales; and additional recordkeeping costs will be 5% of sales. Premium service sles will reduce advertising revenues for Facebook by $10,750 annually because some customers will now only use the premium service.

Plan B.

The company would begin selling Facebook merchandise. It would make additional annual credit sales of $475,000.

Costs associated with Plan B: Cost of these new sales is $385,000. Record keeping and shipping costs will be 3.5% of sales; and uncollectible accounts will be 6% of sales.

Required

1. Compute the additional annual net income or loss expected under each Plan A and Plan B. In your first post list your computation and expected net income or loss amount.

2. Should the company pursue either plan? In your second post, list your decision and discuss your opinion regarding the financial and non-financial factors relevant to this decision.

Answer 1

SOL : 1

COMPUTATION OF NET INCOME OR LOSS

PLAN A

SALES 350000

less

WAGES 236000

CREDIT CARD FEES 4.75% OF SALES 16625

ADDITIONAL RECORD KEEPING COST 5% OF SALES 17500

REDUCE OF ADVERTISING REVENUE 10750

TOTAL COSTS 280875

  

NET INCOME 69125

PLAN B

SALES REVENUE 475000

less

COST OF NEW SALES 385000

RECORD KEEPING AND SHIPPING COSTS 3.5% PF SALES 16625

UNCOLLECTIBLE ACCOUNTS 28500

TOTAL COST 430125

NET INCOME 44875

SOL: 2

Both the plans have Net income. Before deciding which plan is better we have to consider Financial and Non financial factors.

In Plan A the Net Income is more than Plan B. This does't mean that Plan A is better than plan B. By providing premium services the Facebook can attract more customers because it provides advertisement free services. But it will reduce the main source of income of Facebook through advertisement. But Facebook can generate money premium subscription fees. And the premium amount should be feasible. So the customer can afford it. The other factor is that the users of Facebook has been reduced in recent times because of other social networking sites. In order maintain customers the Facebook have to come up with this type of plans.

In Plan B Facebook is trying to promote merchandise selling. Now there are so many online shopping sites available today. But we can say that it will be better to start merchandise selling to capture more customers than earlier. There are lot of risks in this like damage of products, Value for money Etc.

As we can see the Total cost of Plan B is higher than Plan A. As a result of it Plan A the capacity to generate more income than Plan B. So in my opinion Plan A is better Than Plan B.