Debbie changes are implemented:

FEDCO DEPARTMENT STORE

Income Statement

For the year ended December 31, 2005

Net Sales $ 756,000

Cost of Goods sold 539,000

Gross Profit 217,000

Operating Expenses:

Selling Expenses $ 100,000

Administrative Expenses 20,000 120,000

Net Income $ 97,000

Workings:
1. Total sales will increases by 8% for selling price increases by 17%.

 Total Sales will increase = $ 700,000 * 8%

= $ 56,000

Net Sales = $ 700,000 + $ 56,000

= $ 756,000
2. Gross Profit rate will increase by 3%

Gross Profit rate will be = (20+3) %

= 23%

Gross Profit
∴ ×100 = 23
Net Sales

Gross Profit
⇒ ×100 = 23
700,000

Gross Profit
⇒ = 23
7,000

⇒Gross Profit =7,000 ×23

⇒Gross Profit =161,000

Gross Profit = Net Sales – Cost of Goods Sold

⇒ Cost of Goods Sold = Net Sales – Gross Profit

= $ 700,000 – 161,000

= $ 539,000
 Mike’s Ideas are adopted:

FEDCO DEPARTMENT STORE

Income Statement

For the year ended December 31, 2005

Net Sales $ 700,000

Cost of Goods sold 560,000

Gross Profit 140,000

Operating Expenses:

Selling Expenses:

Salaries Expenses $ 30,000

Sales Commission 14,000

Delivery Expenses 24,000

Administrative Expenses 20,000 88,000

Net Income $ 52,000

Workings:
1. Cut 2004 sales salaries of $ 60,000 in half.

Salaries Expense = $ 60,000/2

= $ 30,000
 Give sales personnel a commission of 2 % of net sales.

Sales Commission = Total Sales x 2%

= $ 700,000 x 2%

= $ 14,000

2. Reduced Delivery Expenses by 40% of $ 40,000

= $ 40,000 x 40%

= $ 16,000

So, Delivery Expenses = $ (40,000 – 16000)

= $ 24,000

B) Our Recommendation:

According to Debbie,
According to Debbie’s thinking we can see that he wants to increase the
average selling price by 17%. So the higher the price the lower the demand,
this increase is expected to lower sales volume might reduce the total sales.
Even though, the total sales will increase by 8%.

But in condition, the average selling price will be a bit more than usual so if
there is any competitor in the market or there is any alternate product, the
total sales might not increase that much that he thought.

So Debbie should increase the average selling price less than 17% and it
might increase the total sales more than 8%.

And if he wants to buy merchandise in lager quantity and take all purchase
discounts. These changes are expected to increase the gross profit rate by
3% and it will be 23%.

If the gross profit rate increase, the gross profit will increase and if gross
profit increase the cost of goods sold will decrease.

On the other hand if we consider Debbie’s both ideas we can see that net
sales is increasing and cost of goods sold is decreasing. Gross rate will
increase more than 23%.

217 ,000
×100
Gross profit rate = 756 ,000
= 28 .70 %

According to Mike,
He wants to cut the salary of the sales employees and give them a
commission of 2%.

It has both positive and negative effect. Such as some of the employee will
do better they can increase the sales but some of the employee who is not
skilled can not increase the sales. One hand it is a good idea though it can
decrease salaries expenses. That the reason the overall expenses are goes
down.

And if the delivery reduces to one day per week rather than twice a week it
can reduce the delivery expense by 40%. That the reason net income will
increase then before.

So our recommendation to Debbie and Mike is that; if they implement both

of their ideas then the net income will increase $20,000 to $129,000. So they
should go for both ideas. If they merge those ideas then they can achieve as
they had before.

Implementing Both,

As we see, the ideas individually do not affect much that they want. But if
they go with their both of the ideas then they can profit more than they
receive now. And it will be cover as they earn first. We can give advice that
they should go with the both of those ideas. Because individual implement
could not do much for them. And it only affect if they merge those two plans.
So our recommendation is that, they can do better if they think about our
advice and start doing business with those two.
 Both Sets of proposed changes are made:

FEDCO DEPARTMENT STORE

Income Statement

For the year ended December 31, 2005

Net Sales $ 756,000

Cost of Goods sold 539,000

Gross Profit 217,000

Operating Expenses:

Selling Expenses:

Salaries Expenses $ 30,000

Sales Commission 14,000

Delivery Expenses 24,000

Administrative Expenses 20,000 88,000

Net Income $ 129,000

Note:

As we recommend, we can see if we go with both ideas the profit margin will
increase more then the single implement. So its will be best for their
Department Store.