Question

BTN 7-7 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: Cost 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.

Costs 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 annual 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 nonfinancial factors relevant to this decision.

Short answer

1. Additional net income:

Plan A:$78,875.

Plan B:$74,000.

2. Plan A must be adopted.

Step-by-step solution

Definition of Net Income

The income generated by the business entity after adjusting all the expenses incurred in the business, including tax and interest expenses, is known as net income. It is also known as bottom-line profit.

Additional net income or loss under each plan

Plan A:

Particular	Amount $
Increase in credit sales	$250,000
Less:
Cost of new sales	(135,500)
Credit card fees @ 4.75% of sales	(11,875)
Additional record keeping and shipping cost 6% of sales	(15,000)
Reduction in gross margin of consulting sales @ 25% of consulting sales reduction	(8,750)
Net income additional	$78,875

Plan B:

Particular	Amount $
Additional sales	$500,000
Less:
Cost of sales	(375,000)
Additional record keeping and shipping cost @ 4% of sales	(20,000)
Uncollectible accounts @ 6.2% of sales	(31,000)
Net income additional	$74,000

Decision regarding the selection of plan

The company must choose plan A because this plan provides an additional net income of $78,875 which is more than the additional sales provided by plan B. Also, it does not require any additional investment. At the same time, expanding options will require capital investment in other cities.