HYPE-5 Three years ago, Dana Mann and her brother-inlaw Eric Boldt opened Family Department Store. For the rst two years, business was good, but the following condensed income results for 2014 were disappointing. FAMILY DEPARTMENT STORE lneome Statement For the Year Ended December 31. 2014 Net sales $700,000 Cost of goods sold 553,000 Gross prot 147,000 Operating expenses Selling expenses $100,000 Administrative expenses 20.000 120,000 Net inoome $ 22,000 Dana believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 21%. Eric believes the problem is that operating expenses are too high. Dana thinks the gross profit rate can be improved by making both of the following changes. She does not anticipate that these changes will have any effect on operating expenses. 1. Increase average selling prices by 12%. This increase is expected to lower sales volume so that total sales will increase only 6%. 2. Buy merchandise in larger quantities and take all purchase discounts. These changes are expected to increase the gross profit rate by 3 percentage points. Eric thinks expenses can be cut by making both of the following changes. He feels that these changes will not have any effect on net sales. 1. Cut 2014 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 2014 delivery expenses of $30,000 by 40%. Dana and Eric 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 2015, assuming {1} Dana's changes are implemented and {2] Eric's ideas are adopted. [b] What is your recommendation to Dana and Eric