Question

Three years ago, Amy Hessler and her brother-in-law Jacob Seelig opened Family Department Store. For the first two years, business was good, but the following condensed income results for 2019 were disappointing.

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2019
Net sales				$780,000
Cost of goods sold				624,000
Gross profit				156,000
Operating expenses
Selling expenses		$120,000
Administrative expenses		24,000		144,000
Net income				$ 12,000

Amy believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 20%. Jacob believes the problem is that operating expenses are too high.

Amy thinks the gross profit rate can be improved by making both of the following changes. She does not anticipate that these changes will have any effect on operating expenses.

1.		Increase average selling prices by 17%. This increase is expected to lower sales volume so that total sales will increase only 6%.
2.		Buy merchandise in larger quantities and take all purchase discounts. These changes are expected to increase the gross profit rate by 3 percentage points.

Jacob thinks expenses can be cut by making both of the following changes. He feels that these changes will not have any effect on net sales.

1.		Cut sales salaries of $60,000 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 delivery expenses of $30,000 by 40%.

Amy and Jacob come to you for help in deciding the best way to improve net income.

Answer the following.

Prepare a condensed income statement for 2020, assuming Amy’s changes are implemented.

Prepare a condensed income statement for 2020, assuming Jacob’s ideas are adopted.

Prepare a condensed income statement for 2020, assuming both sets of proposed changes are made.

Answer 1

a condensed income statement for 2020, assuming Amy’s changes are implemented
FAMILY DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2020
NET SALES ( 780000+ 17% of sales + 6% of sales)			967356.00
COST OF GOODS SOLD			744864.12
GROSS PROFIT ( 23% of sales)	A		222491.88
OPERATING EXP	B
Selling expenses		120000
Administrative expenses		24000	144000
Net INCOME	A-B		78491.88
a condensed income statement for 2020, assuming Jacob’s ideas are adopted.
FAMILY DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2020
NET SALES			780000.00
COST OF GOODS SOLD			624000.00
GROSS PROFIT	A		156000.00
OPERATING EXP	B
Selling expenses	60000
Less - Delivery Exp (30000*.40)	12000	48000
Administrative expenses		24000
Commission (780000*.02)		15600	87600
	A-B
Net INCOME			68400.00
a condensed income statement for 2020, assuming both sets of proposed changes are made.
FAMILY DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2020
NET SALES			967356.00
COST OF GOODS SOLD			744864.12
GROSS PROFIT	A		222491.88
OPERATING EXP	B
Selling expenses	60000
Less - Delivery Exp (30000*.40)	12000	48000
Administrative expenses		24000
Commission (780000*.02)		19347	91347.12
Net INCOME	A-B		131144.76