Three years ago, Karen Suez and her brother-in-law Reece Jonesopened Gigasales Department Store. For the first 2 years, businesswas good, but the following condensed income statement results for2017 were disappointing.
GIGASALES DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2017
Net sales
$518,000
Cost of goods sold
414,400
Gross profit
103,600
Operating expenses
Selling expenses
$74,000
Administrative expenses
14,800
88,800
Net income
$14,800
Karen believes the problem lies in the relatively low grossprofit rate of 20%. Reece believes the problem is that operatingexpenses are too high. Karen thinks the gross profit rate can beimproved by making two changes. (1) Increase average selling pricesby 15%; this increase is expected to lower sales volume so thattotal sales dollars will increase only 4%. (2) Buy merchandise inlarger quantities and take all purchase discounts. These changes topurchasing practices are expected to increase the gross profit ratefrom its current rate of 20% to a new rate of 25%. Karen does notanticipate that these changes will have any effect on operatingexpenses.
Reece thinks expenses can be cut by making these two changes.(1) Cut 2018 sales salaries of $44,400 in half and give salespersonnel a commission of 2% of net sales. (2) Reduce storedeliveries to one day per week rather than twice a week; thischange will reduce 2018 delivery expenses of $29,600 by 40%. Reecefeels that these changes will not have any effect on net sales.
Karen and Reece come to you for help in deciding the best way toimprove net income.
Answer the following.
