Trendy Fashions provides store credit and manages its own receivables. Average experience for the past three years has been as follows:

Helen Tran, the owner, is considering whether to accept bank credit cards and discontinue providing store credit. Typically, the availability of bank credit cards increases credit sales by 15 percent. But the bank credit card companies charge approximately 4 percent of credit card sales. If Tran switches to bank credit cards, she can save $5,000 on accounting and other expenses and will eliminate bad debt expense. She figures that cash customers will continue buying in the same volume regardless of the type of credit the store offers.
Required
Should Trendy Fashions start offering bank credit card service and discontinue providing store credit? Show the computations of net income under the present plan and under the bank credit card plan.

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Cash Credit $700,000 420,000 38,000 106,000 $1,740,000 1,044,000 38,000 221,600 Sales $1,040,000 Cost of Goods Sold 624,000 Other Expenses 115,600