Refer to the opening feature about Buffalo Wild Wings. Buffalo Wild Wings has a small segment of its business devoted to merchandising shirts, mugs, hats, and other related items tied to its branding strategy. That merchandising segment has current annual sales of approximately $10 million and prepares the following income statement.
BUFFALO WILD WINGS
Income Statement-Merchandising Segment
For Year Ended January 31, 2013
Net sales . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . $10,000,000
Cost of sales . ...... . . . . . . . . . . . . . . . . . . . . . . . . . 6,100,000
Expenses (other than cost of sales) ...... . . . . . . . . 2,000,000
Net income . . . . . . . . . . . . . . . . . . . . . ... . . . . . . $ 1,900,000
This segment sells to individuals and retailers, ranging from small shops to large chains. Assume that it currently offers credit terms of 1/15, n/60, and ships FOB destination. To improve cash flow, it is considering changing credit terms to 3/10, n/30. In addition, it proposes to change shipping terms to FOB shipping point. The segment's manager expects that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. The segment's manager also expects that delivery expenses will be zero under this proposal; thus, expenses other than cost of sales are expected to increase only 6%.
Required
1. Prepare a forecasted income statement (for this segment) for the year ended January 31, 2014, based on the proposal.
2. Based on the forecasted income statement alone (from your part 1 solution), do you recommend that Buffalo Wild Wings implement the new sales policies? Explain.
3. What else should Buffalo Wild Wings consider before deciding whether or not to implement the new policies? Explain.