Question

M8-1 Evaluating the Decision to Extend Credit [LO 8-1 Nutty Productions Inc. generated service revenue of $48,000 and income from operations of $19,000. The company estimates that, had it extended credit it would have instead generated $87,000 of service revenue, but it would have incurred $34,000 of additional expenses for wages and bad debts. 1-a. Using these estimates, calculate the amount by which Income from Operations would increase (decrease) Income from Operations by 1-b. Should the company extend credit? Yes No

Answer 1

Answer:

Yes

Explanation:

In this question, we have to compare the total income based on credit extended The computation is shown below:

If credit is not extended, then the total income would be

= Service revenue + income from operations

= $48,000 + $19,000

= $67,000

If credit is extended, then the total income would be

= Service revenue + income from operations - additional expenses for wages and bad debts

= $87,000 + $19,000 - $34,000

= $72,000

Yes the company extend credit as the total income is increased by $5,000