Three years ago, Amy and her brother Jacob opened Family Department Store. For the first two years, business was good, but the following condensed income results for 2016 were disappointing. FAMILY DEPARTMENT STORE Income Statement dor the Year Ended December 31, 2016 Net sales $700,000 Cost of goods sold 553,000 Gross profit 147,000 Operating expenses Selling expenses $100,000 Administrative expenses 20,000 120,000 Net income $ 27,000 Amy believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 21%. Jacob believes the problem is that operating expenses are too high. Amy thinks the gross profit rate can be improved by making both of the following changes. She does not anticipate that these changes will have any effect on operating expenses. 1. Increase 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 percentage points. Jacob thinks expenses can be cut by making both of the following changes. He feels that these changes will not have any effect on net sales. 1. Cut sales 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 a week. This change will reduce delivery expenses of $30,000 by 40%. Amy and Jacob come to you for help in deciding the best way to improve net income. Instructions (a) Prepare a condensed income statement for 2017, assuming (1) Amy’s changes are implemented and (2) Jacob’s ideas are adopted. (b) What is your recommendation to Amy and Jacob?

Answer rating: 100% (QA)

FAMILY DEPARTMENT STORE INCOME STATEMENT FOR THE YEAR ENDED 2016 NET SALES 70000000 COGS 55300000 GR... View the full answer