Three years ago, Karen Suez and her brother-in-law Reece Jones opened Gigasales Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2022 were disappointing 

Karen believes the problem lies in the relatively low gross profi t rate of 20%. Reece believes the problem is that operating expenses are too high. Karen thinks the gross profi t rate can be improved by making two changes. She does not anticipate that these changes will have any eff ect on operating expenses. 

1. Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. 

2. Buy merchandise in larger quantities and take all purchase discounts. These changes to selling price and purchasing practices are expected to increase the gross profi t rate from its current rate of 20% to a new rate of 25%. 

Reece thinks expenses can be cut by making these two changes. He feels that these changes will not have any eff ect on net sales. 

1. Cut 2023 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales. 

2. Reduce store deliveries to one day per week rather than twice a week. This change will reduce 2023 delivery expenses of $40,000 by 40%. Karen and Reece come to you for help in deciding the best way to improve net income. 

Instructions 

With the class divided into groups, answer the following. 

a. Prepare a condensed income statement for 2023 assuming (1) Karen’s changes are implemented and (2) Reece’s ideas are adopted. 

b. What is your recommendation to Karen and Reece? 

c. Prepare a condensed income statement for 2023 assuming both sets of proposed changes are made. 

d. Discuss the impact that other factors might have. For example, would increasing the quantity of inventory increase costs? Would a salary cut aff ect employee morale? Would decreased morale aff ect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered?

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Gigasales Department Store Income Statement For the Year Ended December 31, 2022 Net sales $700,000 Cost of goods sold 560,000 Gross profit Operating expenses Selling expenses Administrative expenses 140,000 $100,000 20,000 120,000 $ 20,000 Net income