Suzi Nomro operates Watercraft Supply Company, an online boat parts distributorship that is in its third year of operation. The following income statement was prepared for the year ended October 31, 2019.
Watercraft Supply Company
Income Statement
For the Year Ended October 31, 2019
Revenues:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,350,000
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,365,000
Expenses:
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $810,000.........
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000.........
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000.........
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000.........
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,044,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321,000
Suzi is considering a proposal to increase net income by offering sales discounts of 2/15, n/30 and by shipping all merchandise FOB shipping point. Currently, no sales discounts are allowed and merchandise is shipped FOB destination. It is estimated that the new terms will increase sales by 10%. The ratio of the cost of merchandise sold to sales is expected to be 60%. All selling and administrative expenses are expected to remain unchanged, except for store supplies and miscellaneous selling expenses, which are expected to increase proportionately with increased sales. The amounts of these items for the year ended October 31, 2019, were as follows:
Store supplies expense .................................... $12,000
Miscellaneous selling expenses ............................. 6,000
The interest revenue and expense items will remain unchanged. The shipment of all Merchandise FOB shipping point will eliminate all delivery expenses, which for the year ended October 31, 2019, were $12,000.
Write a brief memo to Suzi discussing the potential benefits and limitations of this proposal. Include a determination of the net income that Watercraft Supply could generate next year under the new proposal, assuming that all sales are collected within the discount period?