May 28, 2016

Homework Help: accounting

Posted by Damon on Thursday, August 9, 2007 at 1:38pm.

Credit Policy Review

The president, vice president, and sales manager of Moorer Corporation were discussing the companyís present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporationís tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current yearís estimated credit sales of $3,000,000 could be increased by a least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this yearís amount of $37,500. He argued that because the companyís 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 wasnít at all sure that increasing credit sales of any kind was a good 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 accounts.

With the information given, determine whether Moorer Corporation would be better off under the sales manager proposal or the vice presidentís proposal. Also, address the presidentís suggestion that credit sales of all types be abolished.

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