Three years ago Maggie Green and her brother-in-law Joe Longway opened FedCo Department Store. For the first 2 years, business was good, but the following condensed income results for 2017 were disappointing.

FEDCO DEPARTMENT STORE

Income Statement

For the Year Ended December 31, 2017

Net sales $700,000

Cost of goods sold 546,000

Gross profit 154,000

Operating Expenses

Selling expenses $100,000

Administrative expenses 25,000

125,000

Net Income $ 29,000

Maggie believes the problem lies in the relatively low gross profit rate of 22%. Joe believes the problem is that operating expenses are too high. Maggie thinks the gross profit rate can be improved by making two changes: 1) Increase the average selling prices by 17%; 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%. Maggie does not anticipate that these changes will have any effect on operating expenses.

Joe thinks expenses can be cut by making these two changes: 1) Cut 2018 sale 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 per week; this change will reduce 2018 delivery expenses of $30,000 by 40%. Joe feels that these changes will not have any effect on sales.

Maggie and Joe come to you for help in deciding the best way to improve net income.

Address the following:

Project 2018 net income assuming 1) Maggies changes are implemented and 2) Joes ideas are adopted.

What is your recommendation to Maggie and Joe?

Project net income if both sets of proposed changes are made.

Discuss the impact that other factors might have. For example, the costs of increased inventory levels, employee morale, the ability to satisfy customer demand and any other factors. Will these factors have any impact on sales or costs?