Jan and Roy Falcon own Club Fab. From its inception, Club Fab has sold merchandise on either
Question:
The Falcons 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: uncollectible accounts 1.6%, billing and mailing costs .5%, and credit investigation fee on new customers .2%.
Jan and Roy also determine that the average accounts receivable balance outstanding during the year is 5% of net credit sales. The Falcons 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.
(c) Discuss both the financial and nonfinancial factors that are relevant to the decision.
Step by Step Answer:
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118162286
7th edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso