Johanna and Jake Berkvom own Campus Fashions. From its inception Campus Fashions has sold goods on either

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Johanna and Jake Berkvom own Campus Fashions. From its inception Campus Fashions has sold goods on either a cash or credit basis, but no credit cards have been accepted. During the past several months, the Berkvoms 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 banks have convinced them to accept their credit cards. One bank, City 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 Berkvoms 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: 

Credit and collection expenses as a percentage of net credit sales are as follows: uncollectable accounts 1.6%, invoicing and mailing costs 0.5%, and credit investigation fee on new customers 0.15%. 

Johanna and Jake also determine that the average accounts receivable balance outstanding during the year is 5% of net credit sales. The Berkvoms estimate that they could earn an average of 10% annually on cash invested in other business opportunities.


Required

With the class divided into groups, answer the following:

(a) Present calculations 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. 

(c) Discuss both the financial and non-financial factors that are relevant to the decision.

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Financial Accounting Reporting Analysis And Decision Making

ISBN: 9780730313748

5th Edition

Authors: Shirley Carlon, Rosina Mladenovic Mcalpine, Chrisann Palm, Lorena Mitrione, Ngaire Kirk, Lily Wong

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