Three years ago, Linda Williams and her brother-in-law Robert Jones opened Marin Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2022 were disappointing. MARIN DEPARTMENT STORE Income Statement For the Year Ended December 31, 2022 Net sales $730,000 Cost of goods sold 584,000 Gross profit 146,000 Operating expenses Selling expenses $103,750 Administrative expenses 20,750 124,500 Net income $21,500 Linda believes the problem lies in the relatively low gross profit rate of 20%. Robert believes the problem is that operating expenses are too high. Linda thinks the gross profit rate can be improved by making two changes. (1) Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. (2) Buy merchandise in larger quantities and take all purchase discounts. These changes to purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%. Linda does not anticipate that these changes will have any effect on operating expenses. Robert thinks expenses can be cut by making these two changes. (1) Cut 2023 sales salaries of $62,250 in half and give sales personnel a commission of 2% of net sales. (2) Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2023 delivery expenses of $41,500 by 40%. Robert feels that these changes will not have any effect on net sales. Linda and Robert come to you for help in deciding the best way to improve net income. Prepare a condensed income statement for 2023 assuming Linda’s changes are implemented. Prepare a condensed income statement for 2023 assuming Robert’s ideas are adopted. Prepare a condensed income statement for 2023 assuming both sets of proposed changes are made. (Round answers to 0 decimal places, e.g. 5,275.)
Three years ago, Linda Williams and her brother-in-law Robert Jones opened Marin Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2022 were disappointing.
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MARIN DEPARTMENT STORE
Income Statement For the Year Ended December 31, 2022 |
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Net sales
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$730,000
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Cost of goods sold
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584,000
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Gross profit
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146,000
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Operating expenses
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Selling expenses
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$103,750
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Administrative expenses
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20,750
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124,500
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Net income
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$21,500
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Linda believes the problem lies in the relatively low gross profit rate of 20%. Robert believes the problem is that operating expenses are too high. Linda thinks the gross profit rate can be improved by making two changes. (1) Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. (2) Buy merchandise in larger quantities and take all purchase discounts. These changes to purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%. Linda does not anticipate that these changes will have any effect on operating expenses.
Robert thinks expenses can be cut by making these two changes. (1) Cut 2023 sales salaries of $62,250 in half and give sales personnel a commission of 2% of net sales. (2) Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2023 delivery expenses of $41,500 by 40%. Robert feels that these changes will not have any effect on net sales.
Linda and Robert come to you for help in deciding the best way to improve net income.
Prepare a condensed income statement for 2023 assuming Linda’s changes are implemented.
Prepare a condensed income statement for 2023 assuming Robert’s ideas are adopted.
Prepare a condensed income statement for 2023 assuming both sets of proposed changes are made. (Round answers to 0 decimal places, e.g. 5,275.)
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