Lambert Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2014, these accounts appeared in its adjusted trial balance.

Accounts Payable............... $ 26,800

Accounts Receivable............... 17,200

Accumulated Depreciation—Equipment...... 68,000

Cash.................... 8,000

Common Stock................ 35,000

Cost of Goods Sold............... 614,300

Freight-Out.................. 6,200

Equipment.................... 157,000

Depreciation Expense............... 13,500

Dividends.................. 12,000

Gain on Disposal of Plant Assets.......... 2,000

Income Tax Expense............... 10,000

Insurance Expense............... 9,000

Interest Expense............... 5,000

Inventory................... 26,200

Notes Payable................. 43,500

Prepaid Insurance............... 6,000

Advertising Expense............... 33,500

Rent Expense................. 34,000

Retained Earnings............... 14,200

Salaries and Wages Expense........... 117,000

Sales Revenue.................. 904,000

Salaries and Wages Payable............ 6,000

Sales Returns and Allowances........... 20,000

Utilities Expense............... 10,600

Additional data: Notes payable are due in 2018.

Instructions

(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.

(b) Calculate the profit margin and the gross profit rate.

(c) The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. Then, compute the revised profit margin and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)