Question: Weddings on Demand sells on account and manages its own receivables. Average experience for the past three years has been as follows:
Unhappy with the amount of bad debts expense she has been experiencing, Aledia Sanchez, controller, is considering a major change in the business. Her plan would be to stop selling on account altogether but accept either cash, credit cards, or debit cards from her customers. Her market research indicates that if she does so, her sales will increase by 10% (i.e., from $350,000 to $385,000), of which $200,000 will be credit or debit card sales and the rest will be cash sales. With a 10% increase in sales, there will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will no longer have bad debts expense, but she will have to pay a fee on debit/credit card transactions of 2% of applicable sales. She also believes this plan will allow her to save $5,000 per year in other operating expenses. Should Sanchez start accepting credit cards and debit cards? Show the computations of net income under her present arrangement and under the plan.