Question

LO 1 E5-71. (Learning Objective 1: Show how to speed up cash from receivables) Patterson Shirt Company sells on credit and manages its own receivables. Average experience for the past three years has been the following: Cash Credit Total $250,000 125,000 Sales... Cost of goods sold.... . ...... Uncollectible-account expense......... Other expenses......... $250,000 125,000 18,000 82,500 $500,000 250,000 18,000 165,000 82,500 The owner of Patterson is considering whether to accept credit cards (VISA and MasterCard) instead of granting credit to customers. If Patterson were to accept credit cards, the owner expects total sales to increase by 10% but cash sales to remain unchanged. Further, if Patterson were to accept credit cards, the business can save $9,000 on other expenses, but the credit card processors charge 3% on credit card sales. Requirement 1. Should Patterson Shirt Company start accepting credit cards? Show the computations of net income under the present plan and under the credit card plan. (Ignore estimated sales returns and refunds for this exercise.)

Answer 1

Calculation of present income if patterson is accepting cash payments

Sales. 250000

-COGS. (125000)

-Other exp .(82500)

Net income. 42500

Calculation of income if patterson is accepting credit card payments

Increase in sales 250000+10% of 250000=275000

Credit card processing charge 3% of 275000=8250

Decrease in other expenses 9000

Sales. 275000

-COGS. (125000)

-Uncollectible account exp. (18000)

-Credit card processing charges (8250)

-other exp. (73500)

Net income . 50250

So from the above calculations it is evident that Mr Patterson should accept credit card payments which increases his income by $7750.