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The Jim Harbaugh company reports current annual sales at approximately $1 million and prepares the following income statement:

Jim Harbaugh Company

Income Statement

For Current Year Ended December 31, 2021

Net sales$1,000,000

Cost of sales 610,000

Expenses (other than COGS) 200,000

Net Income$ 190,000

Assume the business sells to individuals and retailers, ranging from small shops to large chains. Assume that it currently offers credit terms of 1/15, n/60, and ships FOB destination. To improve its cash flow, it is considering changing credit terms to 3/10, n/30. In addition, it proposes to change shipping terms to FOB shipping point. It expects that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. It also expects that delivery expenses will be zero under this proposal: thus, expenses other than cost of sales are expected to increase only 6%.

Required

1. Prepare a forecasted income statement for the next year ended December 31, 2022 based on the proposal.

2. Based on the forecasted income statement alone (from your part 1 solution), do you recommend that the business implement the new sales policies? Explain.

3. What else should the business consider before deciding whether to implement the new policies? Explain.

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