Credit Policy Review
The president, vice president, and sales manager of Moorer Corporation were discussing the company’s present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation’s tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year’s 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 year’s amount of $37,500. He argued that because the company’s 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 wasn’t 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 president’s proposal. Also, address the president’s suggestion that credit sales of all types be abolished.
To determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal, we need to compare the financial impact of each option.
First, let's analyze the sales manager's proposal:
1. Increase in credit sales: The sales manager suggests that by loosening credit restrictions, the company can increase credit sales by at least 20% next year. This would result in an increase of $3,000,000 x 20% = $600,000 in credit sales.
2. Increase in uncollectible accounts receivable: The sales manager states that the increase in uncollectible accounts receivable would be only $10,000 over this year's amount of $37,500. This means the new uncollectible accounts receivable would be $37,500 + $10,000 = $47,500.
3. Cost of sales: The sales manager mentions that the company's cost of sales is only 25% of revenues. Therefore, the cost of sales for the increased credit sales would be $600,000 x 25% = $150,000.
Now, let's analyze the vice president's proposal:
1. Increase in sales from accepting credit cards: The vice president suggests that by accepting consumer credit cards, such as VISA or MASTERCARD, sales could increase by 40%. This would result in an increase of $3,000,000 x 40% = $1,200,000 in sales.
2. Credit card finance charges: The vice president mentions that the credit card finance charges to Moorer Corporation would be 4% of the additional sales. Therefore, the finance charges for the increased sales would be $1,200,000 x 4% = $48,000.
Now, let's evaluate the president's suggestion of abolishing credit sales altogether:
If the company were to discontinue offering sales on accounts, there would be no uncollectible accounts receivable. However, it would also mean potentially losing out on credit sales and the associated revenue.
To determine which proposal is better, we need to compare the financial impact of each option:
Sales Manager's Proposal:
- Increased credit sales: $600,000
- Increase in uncollectible accounts receivable: $47,500
- Cost of sales for increased credit sales: $150,000
Vice President's Proposal:
- Increased sales from accepting credit cards: $1,200,000
- Credit card finance charges: $48,000
Comparing the two proposals, it appears that the Vice President's proposal of accepting credit cards would be more beneficial for Moorer Corporation. The increase in sales from accepting credit cards is significantly higher than the increase in credit sales under the Sales Manager's proposal. Additionally, the credit card finance charges represent a smaller percentage of the additional sales compared to the cost of sales for increased credit sales.
Regarding the President's suggestion of abolishing credit sales altogether, it would eliminate the risk of uncollectible accounts receivable. However, it would also result in potential lost sales and revenue from customers who prefer buying on credit. To make a definite decision on this matter, further analysis is required, taking into consideration the potential impact on customer satisfaction and competitiveness in the market.