Recommenation

Taking key variables such as sales, variable costs and cost of debt into account, the most viable strategy for Southwood Shopmart would necessitate the implementation of the credit card policy. This would involve accepting credit cards in lieu of store credits.

In comparison to the other proposed alternative policies, accepting credit cards poses the only scenario where bad debts are completely eliminated. Considering the significant costs associated with billing and collection, completely doing away with all forms of store credit and accepting credit cards instead, would help in reducing these operation costs by $9000 yearly.

The company’s current diminishing reputation with suppliers would also be helped by a change in policy. The credit card policy would improve Shopwood Shopmart’s current cash squeezed position and payable conversion period caused by a poor receivables system. Since credit card sales are deposited directly into the company’s bank account, the company has enough cash at hand to pay suppliers. This is a major distinction between the credit card policy and the other alternative policies – the others involve lengthy collection periods.

A major advantage Southwood Shopmart has over the competition is its loyal customer base. Introducing credit card payments would therefore open up a new avenue for processing transactions for these customers.

Effectuating the credit card policy would also yield a higher pre-tax profit in comparison to the other proposed policies – while the current policy would result in a predicted after-tax profit of $279,455 credit cards would give an after-tax income of $285,533.

Executing the credit card strategy would involve three transitional periods. In the short term, there should be a discontinuation in the acceptance of new signature credit accounts. Doing this would involve rejecting any credit sales for new customers and issuing a notice to existing signature credit account members, stating that the credit...