(Learning Objective 1: Show how to speed up cash from receivables) Patterson ShirtCompany sells on credit and manages its own receivables. Average experience for the past threeyears has been the following:Sales..................................................Cost of goods sold.............................Uncollectible-account expense...........Other expenses..................................Cash$250,000125,000—82,500Credit$250,000125,00018,00082,500Total$500,000250,00018,000165,000The owner of Patterson is considering whether to accept credit cards (VISA and MasterCard)instead of granting credit to customers. If Patterson were to accept credit cards, the ownerexpects total sales to increase by 10% but cash sales to remain unchanged. Further, if Pattersonwere to accept credit cards, the business can save $9,000 on other expenses, but the credit cardprocessors charge 3% on credit card sales.Requirement1. Should Patterson Shirt Company start accepting credit cards? Show the computations ofnet income under the present plan and under the credit card plan. (Ignore estimated salesreturns and refunds for this exercise.)
(Learning Objective 1: Show how to speed up cash from receivables) Patterson Shirt
Company sells on credit and manages its own receivables. Average experience for the past three
years has been the following:
Sales..................................................
Cost of goods sold.............................
Uncollectible-account expense...........
Other expenses..................................
Cash
$250,000
125,000
—
82,500
Credit
$250,000
125,000
18,000
82,500
Total
$500,000
250,000
18,000
165,000
The owner of Patterson is considering whether to accept credit cards (VISA and MasterCard)
instead of granting credit to customers. If Patterson were to accept credit cards, the owner
expects total sales to increase by 10% but cash sales to remain unchanged. Further, if Patterson
were to accept credit cards, the business can save $9,000 on other expenses, but the credit card
processors charge 3% on credit card sales.
Requirement
1. Should Patterson Shirt Company start accepting credit cards? Show the computations of
net income under the present plan and under the credit card plan. (Ignore estimated sales
returns and refunds for this exercise.)
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