Sheryl Sandberg and Mark Zuckerberg of Facebook are introduced in the chapter’s opening feature. Assume that they are considering two options. Plan A. Facebook would begin selling access to a premium version of its website. The new online customers would use their credit cards. The company has the capability of selling the premium service with no additional investment in hardware or software. Annual credit sales are expected to increase by $250,000.
Costs associated with Plan A: Additional wages related to these new sales are $135,500; credit card fees will be 4.75% of sales; and additional record keeping costs will be 6% of sales. Premium service sales will reduce advertising revenues for Facebook by $8,750 annually because some customers will now only use the premium service.
The company would begin selling Facebook merchandise. It would make additional annual credit sales of$500,000. Costs associated with Plan B: Cost of these new sales is $375,000; additional record keeping 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
(b) Plan B.
2. Should the company pursue either plan? Discuss both the financial and non financial factors relevant to this decision.
