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but the following condensed income results for 2004 were disappointing.Humayun Kabir 2008-2-10-047 SECTION: 07 Department:BBA Date of submission : November 24. .COURSE TITLE: Financial Accounting COURSE ID: ACT 101 PREPARED FOR: Muhammad Zahirul Islam. Department of Business Administration.Ahsanul Karim 2008-2-10-048 Md.2008 CRITICAL THINKING BYP5-5 Three years ago. Debbie Sells and her brother in law Mike Mooney opened FedCo Department Store . business was good.For the first two years. East West University PREPARED BY: Kaysul Islam Anik 2008-2-10-094 Pijush Lodh 2008-2-10-095 Syed Rakib Abdullah 2008-2-10-096 Md.

FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.Cut 2004 sales salaries of $60000 in half and give sales personnel a commission of 2% of net sales.Mike believes the problem is that operating expenses are too high. Debbie does not anticipate that these changes will have any effect on operating expenses.120000 --------------20000 ========= Debbie believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 20%. 1.Increase average selling prices by 17%. Debbie thinks the gross profit rate can be improved by making both of the following changes: 1.These changes are expected to increase the gross profit rate by 3%. 2004 Net sales Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expenses Net income 700000 560000 --------------140000 100000 20000 ----------.This increase is expected to lower sales volume so that total sales will increase only 8%.Buy merchandise in larger quantities and take all purchase discounts. Mike thinks expenses can be cut by making both of the following changes. 2. .

this change will reduce 2004 delivery expenses of $40000 by 40%. Debbie and Mike come to you for help in deciding the best way to improve net income. Mike feels that these changes will not have any effect on net sales.2. 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. ------0------ .Reduce store deliveries to one day per week rather than twice a week.

. 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%) Total selling expenses Administrative expenses Total operating expenses Net income $30000 14000 24000 68000 20000 88000 --------------$52000 ========= The above income statement is completed using Mike’s ideas as all of his idea are implemented .A condensed income statement for 2005 implementing Mike’s ideas FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.But Debbie’s ideas are not used.

we can say that increasing average selling prices instead of. After analyzing the net income of both of the income statement . . which is increased 169. The second income statement shows net income of $52000.RECOMMENDATION From both of the income statement we find that the first income statement net income of $53880.4% than the previous net income. which is increased 160% than the previous net income. decreasing operating expense results more net income.

2004 Net sales Less: Cost of goods sold 756000 582120 -----------173880 Gross profit Less: Operating expenses Selling expenses: Salaries expense Sales personnel commission Delivery expense 30000 15120 24000 69120 Administrative expenses Net income 20000 89120 --------------84760 ========= .CONDENSED INCOME STATEMENT ASSUMING BOTH SETS OF PROPOSED CHANGES FEDCO DEPARTMENT STORE Income Statement For the year ended December 31.