Three years ago Maggie Green and her brother-in-law Joe Longway opened FedCo Dep

Question

Three years ago Maggie Green and her brother-in-law Joe Longway opened FedCo Department Store. For the first 2 years, business was good, but the following condensed income results for 2017 were disappointing.

FEDCO DEPARTMENT STORE

Income Statement

For the Year Ended December 31, 2017

            Net sales                                                                     $700,000

            Cost of goods sold                                                      546,000

            Gross profit                                                                154,000

            Operating Expenses

                        Selling expenses                     $100,000

                        Administrative expenses            25,000

                                                                                                125,000

            Net Income                                                                 $ 29,000

    Maggie believes the problem lies in the relatively low gross profit rate of 22%. Joe believes the problem is that operating expenses are too high. Maggie thinks the gross profit rate can be improved by making two changes: 1) Increase the 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%. Maggie does not anticipate that these changes will have any effect on operating expenses.

    Joe thinks expenses can be cut by making these two changes: 1) Cut 2018 sale 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 per week; this change will reduce 2018 delivery expenses of $30,000 by 40%. Joe feels that these changes will not have any effect on sales.

    Maggie and Joe come to you for help in deciding the best way to improve net income.

Address the following:

Project 2018 net income assuming 1) Maggie’s changes are implemented and 2) Joe’s ideas are adopted.

What is your recommendation to Maggie and Joe?

Project net income if both sets of proposed changes are made.

Discuss the impact that other factors might have. For example, the costs of increased inventory levels, employee morale, the ability to satisfy customer demand and any other factors. Will these factors have any impact on sales or costs?

Explanation / Answer

1. Maggie changes:

Net sales: $ 868140 ( 700000*1.06*1.17)

Gross profit: $ 217,035 ((( 154000/700000)+.03)*868140 )

Net income : 217,035-125,000= 92,035

2. Joe’s : Gross Profit : 154,000

Selling expenses: 100.000 - (60,000/2) + (2% * 700,000)-(30,000*40%) = 72000

Net income: 154,000 -72,000-25000= 57000

3. Maggie and Joe should consider other factors like:

A) should try to add items with higher gross margins

B) increase the product range to take benefits of knock on impact.   

C) introduce discounts to increase sales

D) search for suppliers who can provide just in time delivery in order to cut cost of inventory stocking

E) to reduce frequencies of deliveries during the week might lead to stock outs and customer dissatisfaction

F) Pay cut out may lead to low morale of the employees. Instead give the employees rigorous yet achievable goals

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.