Sheila Felgood is the owner of a small dog-grooming business, Felgood Clippers. She would like to increase her sales over the last three years’ actual results and is looking at a variety of alternatives for increasing business. Her results for the last three years are shown in the table below. The alternatives Sheila is looking at include:

• Scenario 1: Place more ads in the local newspaper offering a 10% discount for dog grooming. The ads would cost $10,000. She believes 50% of the company’s current customers would use the coupons and they would also attract 20% more customers. Sheila currently does 100 grooming's a week at $35 per grooming. If she does more than 120 grooming's, she would need to hire more help, so this would be a big decision for her. The costs of sales and revenue would decline 1% from last year because she now would qualify for volume discounts on several key products. The rest of the costs of the business would remain relatively steady.

• Scenario 2: Open up a second location. She would be able to do 100 more grooming's per week in the new location. Her cost of sales as a percentage of total sales would drop 5% from last year due to the huge increase in volume. Other business expenses would increase 20% due to the increased volume of customers and the complexity of maintaining two sites.

• Scenario 3: Do nothing and expect the revenue and cost of sales to be averages of the last three years. All other costs would be the same as 20x6.

REQUIRED:

a. Develop income statements for these three alternatives.

b. Based solely on the numbers, which alternative should Sheila pursue for the coming year?

c. What else would you like to know before making the decision?

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Felgood Clippers Income Statement for 20x4 to 20x6 20x6 20x5 20x4 Sales revenue $182,000 $172,900 $160,797 Less: Cost of sales $81,900 $76,076 $69,143 Gross Margin Advertising Marketing General office $100,100 $96,824 $91,654 $15,000 $12,500 $12,000 $7,500 $7,000 $6,500 $22,000 $21,000 $20,000 Total SG&A $44,500 $40,500 $38,500 Net Income $55,600 $56,324 $53,154