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Compute the additional annual net income or loss expected

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Reference no: EM132992403

Nichole Mustard and Credit Karmaare 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 recordkeeping costs will be 6% of sales. Premium service sales will reduce advertising revenues 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; additional recordkeeping and shipping costs will be 4% of sales; and uncollectible accounts will be 6.2% of sales.

Required

Problem 1: Compute the additional annual net income or loss expected under (a) Plan A and (b) Plan B. Check (1b) Additional net income, $74,000

Problem 2: Should the company pursue either plan? Discuss both the financial and nonfinancial factors relevant to this decision.

Reference no: EM132992403

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