M8-2 Evaluating the Decision to Extend Credit [LO 8-1 Last year, Pastis Producti

Question

M8-2 Evaluating the Decision to Extend Credit [LO 8-1 Last year, Pastis Productions reported $100,000 in sales and $40,000 in cost of goods sold. The company estimates t would have doubled its sales and cost of goods sold had it allowed customers to buy on credit, but it also would have incurred $50,000 in additional expenses relating to wages, bad debts, and interest. 1-a. Using these estimates, calculate the amount by which Income from Operations would increase (decrease). Income from Operations 1-b. Should Pastis Productions extend credit? Yes No

Explanation / Answer

1a) Income from operating under original = 100000-40000 = 60000

Income from operating under revision = (100000*2-40000*2)-50000 = 70000

Income from operation increase by 10000

1b) Yes, Pastis should productions extend credit.

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