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2008 . East West University PREPARED BY: Md.Humayun Kabir 2008-2-10-047 Kaysul Islam Anik 2008-2-10-094 Pijush Lodh 2008-2-10-095 SECTION: 07 Department:BBA Date of submission : November 24. Department of Business Administration.COURSE TITLE: Financial Accounting COURSE ID: ACT 101 PREPARED FOR: Muhammad Zahirul Islam.Ahsanul Karim 2008-2-10-048 Md.

Debbie thinks the gross profit rate can be improved by making both of the following changes: 1.For the first two years. business was good. FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.120000 --------------$20000 ========= Debbie believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 20%. Buy merchandise in larger quantities and take all purchase discounts.Mike believes the problem is that operating expenses are too high. Debbie Sells and her brother in law Mike Mooney opened FedCo Department Store .This increase is expected to lower sales volume so that total sales will increase only 8%. 2. These changes are expected to increase the gross profit rate by 3%. but the following condensed income results for 2004 were disappointing.CRITICAL THINKING BYP5-5 Three years ago. 2004 Net sales Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expenses Net income $700000 560000 --------------140000 $100000 20000 ----------. Increase average selling prices by 17%. .

Debbie and Mike come to you for help in deciding the best way to improve net income. 1. Mike feels that these changes will not have any effect on net sales.Reduce store deliveries to one day per week rather than twice a week.Cut 2004 sales salaries of $60000 in half and give sales personnel a commission of 2% of net sales.Debbie does not anticipate that these changes will have any effect on operating expenses. 2. Mike thinks expenses can be cut by making both of the following changes. . this change will reduce 2004 delivery expenses of $40000 by 40%. Instructions: a) Prepare a condensed income statement for 2005 assuming 1) Debbie’s changes are implemented and 2) Mike’s ideas are adopted b) What is your recommendation to Debbie and Mike? c) Prepare a condensed income statement for 2005 assuming both sets of changes are made.

A condensed income statement for 2005 implementing Mike’s ideas . 2004 Net sales Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expenses Net income $756000 582120 --------------173880 $100000 20000 ----------- 120000 --------------$53880 ========= The above income statement is completed using Debbie’s ideas as all of his idea are implemented .A condensed income statement for 2005 implementing Debbie’s ideas FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.But Mike’s idea is not used as his ideas are adopted which are not implemented.

2004 Net sales Cost of goods sold $700000 560000 ----------140000 Gross profit Operating expenses: Selling expenses: Salaries expense ($60000*1/2) Sale commission expense ($700000*2%) Delivery expense ($40000*60%) $30000 14000 24000 Total selling expenses 68000 Administrative expenses 20000 Total operating expenses Net income 88000 --------------$52000 ========= The above income statement is completed using Mike’s ideas as all of his idea are implemented .FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.But Debbie’s ideas are not used. .

4% than the previous net income. which is increased 160% than the previous net income. net income is $52000. decreasing operating expense we can increase our net income. After analyzing the net income of both of the income statement and compare both of it with the previous income statement. But if we are able to increase average sales and on the same time reduce operating expense it will also help us to gain more profit. we can say that by increasing average selling prices and decreasing sales discount and sales return instead of. CONDENSED INCOME STATEMENT ASSUMING BOTH SETS OF PROPOSED CHANGES . net income is $53880. And from the second income statement where we use Mike’s ideas. which is increased 169. But in the income statement of 2005 which we completed by using Debbie’s ideas.RECOMMENDATION From the income statement of 2004 0f Fedco Department Store we find that net income of the organization was $20000.

000*60%) 24000 Total selling expenses 69120 Administrative expenses 20000 89120 --------------$84760 ========= Net income ------0------ .FEDCO DEPARTMENT STORE Income Statement For the year ended December 31. 2004 Net sales Less: Cost of goods sold $756000 582120 -----------$173880 Gross profit Less: Operating expenses Selling expenses: Salaries expense (60.000*1/2) $30000 Sales commission expenses ($756000*2%) 15120 Delivery expense (40.