Hello everyone,
I'm at a real lose on this one: I've tried to get my arms wrapped around it but can't seem to do it. Homework is due tonight (I'm not planning on being an accountant.. God bless you that are.:) ). Any help would be greatly appreciated.

Here's the info and questions: (more like a whole book than just a question... )

The president, vice president, and sales manager of Moorer Corporation were discussing the company's present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation's tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year's estimated credit sales of $3,000,000 could be increased by at least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this year's amount of $37,500. He argued that because the company's cost of sales is only 25% of revenues, the company would certainly come out ahead.
The vice president, however, suggested that a better alternative to easier credit terms would be to accept consumer credit cards such as VISA or MASTERCARD. She argued that this alternative could increase sales by 40%. The credit card finance charges to Moorer Corporation would be 4% of the additional sales.
At this point, the president interrupted by saying that he wasn't at all sure that increasing credit sales of any kind was agood thing. In fact, he suggested that the $37,500 of uncollectible accounts receivable was altogether too high. He wondered whether the company should discontinue offering sales on account.
With the information given, determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal. Also, address the president's suggestion that credit sales of all types be abolished.

The assumption you have to make is that the facts are correct since it seems to indicate that it is only the opinion of both the sales manager and the Vice President. Assuming that they are…

Sales Manager's Comments:
$3,000,000
X 1.20
3,600,000

Bad Debts:
37,500
+10,000
47,500

So Sales would increase by $600,000 and Bad Debit (a cost/expense) would increase by $10,000


Vice President's Comments:
Increase sales by 40%. We will use the 3 Million figure since that is the only one we have.

3,000,000
X 1.40
4,200,000

Extra sales of (4.2M – 3M = 1.2M)
1,200,000 x 0.04 (cost) = 48,000

There will be extra sales of $1,200,000 and extra costs of $48,000


Comparing their 2 plans:
Sales Manager - Sales up 600,000
Vice President - Sales up 1,200,000 (double)

Costs:
Sales Manager = 10,000
Vice President should be 20,000 in theory to break even since sales are double. His costs are $48,000.

Therefore, VP plan is less efficient…or is it?

Once can argue from a pure numbers point, the Sales Managers plan is the more profitable one. But, once can argue that a VISA or MasterCard sale is far more secure in terms of collection than giving credit to customers. However, one could also argue that the risk might be justified with the Sale's Managers approach considering how much lower expected costs are.


President's Comments:
Right now you have:
Credit Sales 3,000,000
Bad Debts: 37,500
Cost Per Sale at 25% = 3,000,000 x .25 = 750,000
Total Costs = 750,000 + 37,500 = 787,500

Net Profit on the Credit Sales = 3,000,000 – 787,500 = 2,212,500

Even though the President feels selling on credit is a silly idea, the numbers would argue.

The company is still making a profit, even with the bad debts.

If the company chose not to sell on credit, all those credit sales would disappear, and the profit (after the bad debts) would also disappear.

If the profits were like $5,000 or something, then the President would have a more viable case in my opinion. But they aren't, so he doesn't.


Conclusions
I would go with the Sales Managers approach for the reasons I stated above.

Quote:

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Originally Posted by HouTxMan

Hello everyone,
I'm at a real lose on this one: I've tried to get my arms wrapped around it but can't seem to do it. Homework is due tonight (I'm not planning on being an accountant..God bless you that are.:) ). Any help would be greatly appreciated.

Here's the info and questions: (more like a whole book than just a question...)

The president, vice president, and sales manager of Moorer Corporation were discussing the company's present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation's tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year's estimated credit sales of $3,000,000 could be increased by at least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this year's amount of $37,500. He argued that because the company's cost of sales is only 25% of revenues, the company would certainly come out ahead.
The vice president, however, suggested that a better alternative to easier credit terms would be to accept consumer credit cards such as VISA or MASTERCARD. She argued that this alternative could increase sales by 40%. The credit card finance charges to Moorer Corporation would be 4% of the additional sales.
At this point, the president interrupted by saying that he wasn't at all sure that increasing credit sales of any kind was agood thing. In fact, he suggested that the $37,500 of uncollectible accounts receivable was altogether too high. He wondered whether the company should discontinue offering sales on account.
With the information given, determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal. Also, address the president's suggestion that credit sales of all types be abolished.

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Thanks so much.

Quote:

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Originally Posted by CaptainForest

The assumption you have to make is that the facts are correct since it seems to indicate that it is only the opinion of both the sales manager and the Vice President. Assuming that they are…

Sales Manager’s Comments:
$3,000,000
X 1.20
3,600,000

Bad Debts:
37,500
+10,000
47,500

So Sales would increase by $600,000 and Bad Debit (a cost/expense) would increase by $10,000


Vice President’s Comments:
Increase sales by 40%. We will use the 3 Million figure since that is the only one we have.

3,000,000
X 1.40
4,200,000

Extra sales of (4.2M – 3M = 1.2M)
1,200,000 x 0.04 (cost) = 48,000

There will be extra sales of $1,200,000 and extra costs of $48,000


Comparing their 2 plans:
Sales Manager - Sales up 600,000
Vice President - Sales up 1,200,000 (double)

Costs:
Sales Manager = 10,000
Vice President should be 20,000 in theory to break even since sales are double. His costs are $48,000.

Therefore, VP plan is less efficient…or is it?

Once can argue from a pure numbers point, the Sales Managers plan is the more profitable one. But, once can argue that a VISA or MasterCard sale is far more secure in terms of collection than giving credit to customers. However, one could also argue that the risk might be justified with the Sale’s Managers approach considering how much lower expected costs are.


President’s Comments:
Right now you have:
Credit Sales 3,000,000
Bad Debts: 37,500
Cost Per Sale at 25% = 3,000,000 x .25 = 750,000
Total Costs = 750,000 + 37,500 = 787,500

Net Profit on the Credit Sales = 3,000,000 – 787,500 = 2,212,500

Even though the President feels selling on credit is a silly idea, the numbers would argue.

The company is still making a profit, even with the bad debts.

If the company chose not to sell on credit, all those credit sales would disappear, and the profit (after the bad debts) would also disappear.

If the profits were like $5,000 or something, then the President would have a more viable case in my opinion. But they aren’t, so he doesn’t.


Conclusions
I would go with the Sales Managers approach for the reasons I stated above.

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I have the same question for an assignment, and I tried understanding the approach you took, but I guess I am lost at one part. If the sales in the Sales Mgr's plan goes up by 600,000 and the costs go up 10,000... that means the profit ends up being 590,000. The VP's plan suggests the increase would go up by 1,200,000 and costs would be 48,000 meaning the profit is 1,152,000.00. I am confused, then, why the VP's plan is less efficient? In the end, if the figures are real, doesn't the VP come out ahead - with more of a profit? I am sure I am misunderstanding something or completely missing something, but I am lost there.. If you could explain this to me, I'd be grateful! Thanks!:confused: