Wolford 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 companys fiscal year on November 30, 2017, 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

Wolford Department Store

Income Statement

For the Year Ended November 30,2017

Sales Revenue $904,000

Sales Returns and Allowances ($20,000 )

Net Sales $884,000

Cost of Goods Sold ($614,300)

Gross profit $269,700

Operating expenses:

• Wages Expense $117,000
• Advertising Expense $33,500
• Rent Expense $34,000
• Depreciation Expense $13,500
• Insurance Expense $9,000
• Utilities Expense $10,600
• Freight-Out $6,200

Total operating expenses ($223,800)

Income from operations $45,900

Other revenues:

Gain on Disposal of Plant Assets $2,000

Other expenses:

Interest Expense ($5,000 )

Income before income taxes $42,900

Income Tax Expense ($10,000)

Net income after taxes $32,900

Wolford Department Store

Statement of Retained Earnings

For the Year Ended November 30,2017

Retained earnings at the beginning of the period: $14,200

Net income after taxes: $32,900

Dividends ($12,000)

Retained earnings at the end of the period: $35,100

Wolford Department Store

Balance Sheet

For the Year Ended November 30,2017

Assets:

Cash $8,000

Accounts Receivable $17,200

Prepaid Insurance $6,000

Inventory $26,200

Equipment $157,000

Accumulated Depreciation - Equipment (68,000)

Total Assets: $146,400

Liabilities and Stockholders' Equity:

Accounts Payable $26,800

Wages Payable $6,000

Notes Payable $43,500

Common Stock $35,000

Retained Earnings $35,100

Total Liabilities and Stockholders' Equity: $146,400

Profit Margin 3.7%

Gross Profit Margin 30.5%

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. (Hint: You do not need to prepare an income statement.) 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.)

Revised Net Income: $____________

Revised Profit Margin: ____________%

Revised Gross Profit Rate ____________%