The Doyle Merchandising Company currently sells products only through its store

Question

The Doyle Merchandising Company currently sells products only through its store in Lowell, MA. The company’s expected income statement for store operations in August is presented below.

Doyle Merchandising Company

Income Statement (for Store Operations Only)

For the Month Ended August 31

Sales

$280,000

Cost of Goods Sold

168,000

Gross Profit

$112,000

Operating Expenses

78,400

Income Before Taxes

$33,600

Income Taxes Expense

$11,760

Net Income

$21,840

The company expects to make catalog sales of $20,000 in September. The company expects its cost of goods sold to continue to average 60% of sales. Catalog operating expenses, other than uncollectible accounts expense, are expected to be 19% of catalog sales. The company’s income taxes rate is expected to continue to average 35% of income before taxes. Although the company collects all its accounts receivable resulting from store sales, it expects to collect only 96% of catalog sales. Determine the expected total operating expenses for the company’s September $20,000 catalog sales.

$1,840

$4,600

$3,800

$16,600

$83,000

Doyle Merchandising Company

Income Statement (for Store Operations Only)

For the Month Ended August 31

Explanation / Answer

Solution:

Expected catalog sales = $20,000

Catalog operating expenses, other than uncollectible accounts expense = $20,000 * 19% = $3,800

Expected collection = 96% of catalog sales

Estimated uncollectible account expense = $20,000 * 4% = $800

Expected total operating expenses for the company’s September $20,000 catalog sales = $3,800 + $800 = $4,600

Hence option b is correct.

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