Refer to the opening feature about CoCaLo. Assume that Renee Pepys Lowe estimates current annual sales at approximately $10 million and reports the following income statement.

CoCaLo sells to various retailers, ranging from small shops to large chains such as Target. Assume that Renee Pepys Lowe currently offers credit terms of 1/15, n/60, and ships FOB destination. To improve her cash flow, Lowe is considering changing her credit terms to 3/10, n/30. In addition, she proposes to change her shipping terms to FOB shipping point. She expects that the increase in discount rate will increase her net sales by 9%, but her gross margin ratio (and ratio of cost of sales divided by net sales)
is expected to remain unchanged. She also expects that her delivery expenses will be zero under this proposal; thus, her expenses other than cost of sales are expected to increase only 6%.
Required

I. Prepare a forecasted income statement for the year ended January 31, 2008, based on the proposal.
2. Based on the forecasted income statement alone (from part 1), do you recommend CoCaLo implement the new sales policies? Explain.
3. What else should Lowe consider before she decides whether or not to implement the new policies?
Explain.

Transcribed Image Text:

COCALO Income Statement For Year Ended January 31, 2007 Net sales.. Cost of sales.. Expenses (other than cost of sales) Net income $10,000,000 6,100,000 2,000,000 $ 1,900,000