Question - Rakia Reynolds of Skai Blue Media is introduced in the chapter's opening feature. Rakia has a client that currently sells his products through multiple outlets. The client asks Rakia for guidance as he is considering two possible plans, A or B, for expanding sales for his merchandising company.
Plan A. The client would begin selling additional products online directly to customers, which are only currently sold directly to stores. These new online customers would use their credit cards. It currently has the capability of selling through its website with no additional investment in hardware or software. Credit sales are expected to increase by $250,000 per year. Costs associated with this plan are: cost of these sales will be $135,500, credit card fees will be 4.75% of sales, and additional recordkeeping and shipping costs will be 6% of sales. These online sales will reduce the sales to stores by $35,000 because some customers will now purchase items online. Sales to stores have a 25% gross margin percentage.
Plan B. The client would expand its market to more stores. It would make additional credit sales of $500,000 to those stores. Costs associated with those sales are: cost of sales will be $375,000, additional recordkeeping and shipping will be 4% of sales, and uncollectible accounts will be 6.2% of sales.
Required:
1. Compute the additional annual net income or loss expected under (a) Plan A and (b) Plan B.
2. Should the client pursue either plan? Discuss both the financial and nonfinancial factors relevant to this decision.