Question

ichole Mustard and Credit Karma are introduced in the chapter's opening feature. Assume that they are considering two options.

Plan A.

The company 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 $250,000.

Costs associated with Plan A: Additional wages related to these new sales are $135,500; credit card fees will be 4.75% of sales; and additional record keeping costs will be 6% of sales. Premium service sales will reduce advertising revenue by $8,750 annually because some customers will now only use the premium service.

Plan B.

The company would begin selling merchandise. It would make additional annual credit sales of $500,000.

Costs associated with Plan B: Cost of these new sales is $375,000. Record keeping and shipping costs will be 4.0% of sales; and uncollectible accounts will be 6.2% of sales.



Required:
Compute the additional annual net income or loss expected under (a) Plan A and (b) Plan B. In your first post show your computations and the expected net income or loss amount. Include your work and your solution to both plans.

Answer 1

Part A

Plan A [selling access to a premium version of its website]
Incresae in credit sales		250,000
Less:
Increment in wages	135,500
Credit card fees (250000*4.75%)	11,875
Additional record keeping costs (250000*6%)	15,000
Opportunity cost (Reduce advertising revenue)	8,750	171,125
Additional annual net income (loss) expected under Plan A		78,875

Part B

Plan B [Selling merchandise]
Incresae in credit sales		500,000
Less:
Cost of these new sales	375,000
Additional record keeping costs (500000*4%)	20,000
Uncollectible expenses (500000*6.2%)	31,000	426,000
Additional annual net income (loss) expected under Plan B		74,000

Company should first select the Plan A [selling access to a premium version of its website].