Emilio and Rene Santos own Club Fandango. From its inception, Club Fandango has sold merchandise on either

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Emilio and René Santos own Club Fandango. From its inception, Club Fandango has sold merchandise on either a cash or credit basis, but no credit cards have been accepted. During the past several months, the Santos have begun to question their credit- sales policies. First, they have lost some sales because of their refusal to accept credit cards. Second, representatives of two metropolitan banks have convinced them to accept their national credit cards. One bank, Business National Bank, has stated that (1) its credit card fee is 4% and (2) it pays the retailer 96 cents on each $1 of sales within 3 days of receiving the credit card billings.

The Santos decide that they should determine the cost of carrying their own credit sales. From the accounting records of the past 3 years, they accumulate these data:

Emilio and René Santos own Club Fandango. From its inception,

Credit and collection expenses as a percentage of net credit sales are as follows: uncollectible accounts 1.6%, billing and mailing costs .5%, and credit investigation fee on new customers .2%.
Emilio and René also determine that the average accounts receivable balance out- standing during the year is 5% of net credit sales. The Santos estimate that they could earn an average of 10% annually on cash invested in other business opportunities.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a tabulation for each year showing total credit and collection expenses in dollars and as a percentage of net credit sales.
(b) Determine the net credit and collection expenses in dollars and as a percentage of sales after considering the revenue not earned from other investment opportunities. (Note: The income lost on the cash held by the bank for 3 days is considered to be immaterial.)
(c) Discuss both the financial and nonfinancial factors that are relevant to the decision.

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Related Book For  book-img-for-question

Accounting Tools for Business Decision Making

ISBN: 978-1118096895

6th edition

Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso

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