Gigasales Department Store Income Statement For the Year Ended December 31, 2022 Net sales $700,000 Cost of goods sold 560,000 Gross profit 140,000 Operating expenses Selling expenses $100,000 Administrative expenses 20,000 120,000 Net income $ 20,000 Karen believes the problem lies in the relatively low gross profit rate of 20%. Reece believes the problem is that operating expenses are too high. Karen thinks the gross profit rate can be improved by making two changes. She does not anticipate that these changes will have any effect on operating expenses. Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. Buy merchandise in larger quantities and take all purchase discounts. These changes to selling price and purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%. Reece thinks expenses can be cut by making these two changes. He feels that these changes will not have any effect on net sales. Cut 2023 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales. Reduce store deliveries to one day per week rather than twice a week. This change will reduce 2023 delivery expenses of $40,000 by 40%. Karen and Reece come to you for help in deciding the best way to improve net income Instructions Discuss the impact that other factors might have. For example, would increase the quantity of inventory increase costs? Would a salary cut affect employee morale? Would decreased morale affect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered?
Gigasales Department Store
Income Statement
For the Year Ended December 31, 2022
Net sales $700,000
Cost of goods sold 560,000
Gross profit 140,000
Operating expenses
Selling expenses $100,000
Administrative expenses 20,000
120,000
Net income $ 20,000
Karen believes the problem lies in the relatively low gross profit rate of 20%. Reece believes the problem is that operating expenses are too high. Karen thinks the gross profit rate can be improved by making two changes. She does not anticipate that these changes will have any effect on operating expenses.
- Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%.
- Buy merchandise in larger quantities and take all purchase discounts. These changes to selling price and purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%.
Reece thinks expenses can be cut by making these two changes. He feels that these changes will not have any effect on net sales.
- Cut 2023 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales.
- Reduce store deliveries to one day per week rather than twice a week. This change will reduce 2023 delivery expenses of $40,000 by 40%.
Karen and Reece come to you for help in deciding the best way to improve net income
Instructions
Discuss the impact that other factors might have. For example, would increase the quantity of inventory increase costs? Would a salary cut affect employee morale? Would decreased morale affect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
