Your sister operates Emigrant Parts Company, an online boat parts distributorship that is in its third year of operation. The income statement is shown at the top of the following page and was recently prepared for the year ended July 31, 2008. Your sister is considering a proposal to increase net income by offering sales discounts of 2/15, n/30, and by shipping all merchandise FOB shipping point. Currently, no sales discounts are allowed and merchandise is shipped FOB destination. It is estimated that these credit terms will increase net sales by 15%. The ratio of the cost of merchandise sold to net sales is expected to be 65%. All selling and administrative expenses are expected to remain unchanged, except for store supplies, miscellaneous selling, office supplies, and miscellaneous administrative expenses, which are expected to increase proportionately with Emigrant Parts Company Income Statement For the Year Ended July 31, 2008 Revenues: Net sales $800,000 Interest revenue 10,000 Total revenues $810,000 Expenses: Cost of merchandise sold 520,000 Selling expenses 90,000 Administrative expenses 48,550 Interest expense 15,000 Total expenses 673,550 Net income $136,450 increased net sales. The amounts of these preceding items for the year ended July 31, 2008, were as follows: Store supplies expense $12,000 Miscellaneous selling expense 3,000 Office supplies expense 2,000 Miscellaneous administrative expense 1,000 The other income and other expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all delivery expense, which for the year ended July 31, 2008, were $18,750. 1. Prepare a projected single-step income statement for the year ending July 31, 2009, based on the proposal. Assume all sales are collected within the discount period. 2. a. Based on the projected income statement in (1), would you recommend the implementation of the proposed changes? b. Describe any possible concerns you may have related to the proposed changes described in (1).
Your sister operates Emigrant Parts Company, an online boat parts distributorship that is in its third year of operation. The income statement is shown at the top of the following page and was recently prepared for the year ended July 31, 2008.
Your sister is considering a proposal to increase net income by offering sales discounts of 2/15, n/30, and by shipping all merchandise FOB shipping point. Currently, no sales discounts are allowed and merchandise is shipped FOB destination. It is estimated that these credit terms will increase net sales by 15%. The ratio of the cost of merchandise sold to net sales is expected to be 65%. All selling and administrative expenses are expected to remain unchanged, except for store supplies, miscellaneous selling, office supplies, and miscellaneous administrative expenses, which are expected to increase proportionately with
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Emigrant Parts Company Income Statement For the Year Ended July 31, 2008 |
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Revenues: |
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Net sales |
$800,000 |
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Interest revenue |
10,000 |
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Total revenues |
$810,000 |
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Expenses: |
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Cost of merchandise sold |
520,000 |
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Selling expenses |
90,000 |
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Administrative expenses |
48,550 |
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Interest expense |
15,000 |
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Total expenses |
673,550 |
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Net income |
$136,450 |
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increased net sales. The amounts of these preceding items for the year ended July 31, 2008, were as follows:
|
Store supplies expense |
$12,000 |
|
Miscellaneous selling expense |
3,000 |
|
Office supplies expense |
2,000 |
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Miscellaneous administrative expense |
1,000 |
The other income and other expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all delivery expense, which for the year ended July 31, 2008, were $18,750.
1. Prepare a projected single-step income statement for the year ending July 31, 2009, based on the proposal. Assume all sales are collected within the discount period.
2. a. Based on the projected income statement in (1), would you recommend the implementation of the proposed changes?
b. Describe any possible concerns you may have related to the proposed changes described in (1).
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