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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Communication

Suzi Nomro operates Watercraft Supply Company, an online boat parts distributorship Communication that is in its third year of operation. The following income statement was prepared for the year ended October 31, 2019.

Watercraft Supply Company Income Statement For the Year Ended October 11, 2019
Revenues:
Sales $1,350,000
Interest 15,000
Total revenues $1,365,000
Expenses:
Cost of merchandise sold $810,000
Selling expenses 140,000
Administrative expenses 90,000
Interest expense 4,000
Total expenses 1,044,000
Net income $ 321,000

Suzi 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 the new terms will increase sales by 10%. The ratio of the cost of merchandise sold to sales is expected to be 60%. All selling and administrative expenses are expected to remain unchanged, except for store supplies and miscellaneous selling expenses, which are expected to increase proportionately with increased sales. The amounts of these items for the year ended October 31, 2019, were as follows:

Store supplies expense $ 12,000
Miscellaneous selling expenses 6.000

The interest revenue and expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all delivery expenses, which for the year ended October 31, 2019, were $12,000.

Write a brief memo to Suzi discussing the potential benefits and limitations of this proposal. Include a determination of the net income that Watercraft Supply could generate next year under the new proposal, assuming that all sales are collected within the discount period.

To determine

The income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

To Prepare: A MEMO to Mr. S of Company W.

Explanation

MEMO

Dated: 30/11/2020

From:

ABC

To:

Mr. S

Company W

Subject:  Potential benefits and limitations of the proposal.

Mr. S

Company W

Company W can easily increase the net income by $64,200, from $321,000 to $385,200 if the projected changes in credit terms increase the sales by 10% as predicted. This proposal will increase the sales by $135,000 and cost of goods sold is also increased by 60% of the sales increased ($135,000) or $81,000. Whereas the other selling expenses will increase proportionately to sales. The selling expense will decrease by $10,200 as there is a changes in freight terms (from FOB destination to FOB shipping point). Company W will save $12,000 in freight costs. The entire changes will result in an increase of $64,200

However, the company will face certain potential risks associated with the proposal. The following are some risks associated with the proposal:

  • The accuracy of projected figure and actual changes are not certain.
  • Company W will incur a major cost of carrying excess inventory if the increase in sales does not appear.
  • The changes in discount terms will reduce the cash collections from customers and it may generate a liquidity problem for Company W.
  • Many customers may seek other vendors due to the changes in freight terms. This will results decline in sales.

Although the outcomes indicate the company to adapt the proposal, projections are naturally uncertain, and there is no surety that the actual results will match with the projections...

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