PROBLEM 8–1 The following data are excerpted from the annual report of Lands’ End:

For the period ended Year 9 Year 8 Year 7 Year 6 Year 5 Net sales................................................... 100% 100% 100% 100% 100%

Cost of sales............................................. 55.0 53.4 54.5 57.0 57.6 Gross profit............................................... 45.0 46.6 45.5 43.0 42.4 Selling, general, and administrative......... 39.7 38.8 37.9 38.0 36.0 Other expenses ......................................... 3.0 2.7 3.0 2.0 2.8 Net income................................................ 2.3% 5.1% 4.6% 3.0% 3.6%

Required:

a. Discuss three factors that determine the level of sales and the level of gross profit as a percentage of sales in the context of the operations of Lands’ End.

b. Interpret the gross profit percentage (45% in fiscal Year 9) in simple terms and in the context of Lands’ Ends operations.

c. Catalog mailing costs constitute a large percentage of the selling, general, and administrative costs for Lands’

End. These costs have risen steadily as a percent of sales (only 32.4% in fiscal Year 4). Discuss drivers (determinants)

of total catalog mailing costs and indicate ways that Lands’ End can control these costs. With each suggestion, indicate how the level of sales might be affected.