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Workings:
1. Total sales will increases by 8% for selling price increases by 17%.
= $ 56,000
Net Sales = $ 700,000 + $ 56,000
= $ 756,000
= 23%
Gross Profit
∴ ×100 = 23
Net Sales
Gross Profit
⇒ ×100 = 23
700,000
Gross Profit
⇒ = 23
7,000
= $ 700,000 – 161,000
= $ 539,000
Workings:
= $ 40,000 x 40%
= $ 16,000
So, Delivery Expenses = $ (40,000 – 16000)
= $ 24,000
B) Our Recommendation:
According to Debbie,
According to Debbie’s thinking we can see that he wants to increase the average selling
price by 17%. So the higher the price the lower the demand, this increase is expected to
lower sales volume might reduce the total sales. Even though, the total sales will increase
by 8%.
But in condition, the average selling price will be a bit more than usual so if there is any
competitor in the market or there is any alternate product, the total sales might not
increase that much that he thought.
So Debbie should increase the average selling price less than 17% and it might increase
the total sales more than 8%.
And if he wants to buy merchandise in lager quantity and take all purchase discounts.
These changes are expected to increase the gross profit rate by 3% and it will be 23%.
If the gross profit rate increase, the gross profit will increase and if gross profit increase
the cost of goods sold will decrease.
ACT 101
On the other hand if we consider Debbie’s both ideas we can see that net sales is
increasing and cost of goods sold is decreasing. Gross rate will increase more than 23%.
217 ,000
×100
Gross profit rate = 756 ,000
= 28 .70 %
According to Mike,
He wants to cut the salary of the sales employees and give them a commission of 2%.
It has both positive and negative effect. Such as some of the employee will do better they
can increase the sales but some of the employee who is not skilled can not increase the
sales. One hand it is a good idea though it can decrease salaries expenses. That the reason
the overall expenses are goes down.
And if the delivery reduces to one day per week rather than twice a week it can reduce
the delivery expense by 40%. That the reason net income will increase then before.
So our recommendation to Debbie and Mike is that; if they implement both of their ideas
then the net income will increase $20,000 to $129,000. So they should go for both ideas.
If they merge those ideas then they can achieve as they had before.
Implementing Both,
As we see, the ideas individually do not affect much that they want. But if they go with
their both of the ideas then they can profit more than they receive now. And it will be
cover as they earn first. We can give advice that they should go with the both of those
ideas. Because individual implement could not do much for them. And it only affect if
they merge those two plans. So our recommendation is that, they can do better if they
think about our advice and start doing business with those two.
Note:
As we recommend, we can see if we go with both ideas the profit margin will increase
more then the single implement. So its will be best for their Department Store.