Question

The co-founders of ReGreen Corporation are introduced in the chapter's opening feature. Assume that they are considering two new selling options. Plan A: ReGreen would begin selling instruction videos on reducing water usage online directly to customers. The new online customers would use their credit cards. The company has the capability of selling instructional videos through its website with no additional investment in hardware or software. Annual credit sales are expected to increase by $250,000. Costs associated with plan A: Costs of these new sales is $135,500; credit card fees will be 4.75% of sales; and additional recordkeeping and shipping costs will be 6% of sales. Instructional video sales will reduce consulting sales for ReGreen by $35,000 annually because some customers will now only purchase instructional videos-- Assume that consulting sales for ReGreen have a 25% gross margin percentage. Plan B: ReGreen would expand to more cities. It would make additional annual credit sales of $500,000 to customers in those new cities. Cost associated with Plan B: Cost of these new sales is $375,000; additional recordkeeping and shipping costs will be 4% of sales; and uncollectible accounts will be 6.2% of sales. REQUIRED: 1. Compute the additional net income or loss expected under (a) Plan A and (b) Plan B. 2. Should the company pursue either plan? Discuss both the financial and non-financial factors relevant to this decision.

Answer 1

1.

(a) Plan A

(b) Plan B

2.

YES. Company Should pursue Plan A.
Reasons -
The additional net income in Plan A is higher than Plan B.
The Profit Margin is higher in Plan A.
Plan B has possibility of uncollectible accounts. So, there is risk of bad-debts.
For Plan A, there is no additional investment in hardware or software.