COURSE TITLE: Financial Accounting

COURSE ID: ACT 101

PREPARED FOR:
Muhammad Zahirul Islam,
Department of Business Administration,
East West University

PREPARED BY:
Md.Ahsanul Karim
2008-2-10-048
Md.Humayun Kabir
2008-2-10-047
Kaysul Islam Anik
2008-2-10-094
Pijush Lodh
2008-2-10-095

SECTION: 07
Department:BBA

Date of submission : November 24,2008

CRITICAL THINKING
BYP5-5

Three years ago, Debbie Sells and her brother in law Mike Mooney
opened FedCo Department Store .For the first two years, business was
good, but the following condensed income results for 2004 were
disappointing.

FEDCO DEPARTMENT STORE

Income Statement
For the year ended December 31, 2004
Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Administrative expenses
Net income

$700000
560000
--------------140000
$100000
20000
----------- 120000
--------------$20000
=========

Debbie believes the problem lies in the relatively low gross profit rate
(gross profit divided by net sales) of 20%.Mike believes the problem is
that operating expenses are too high.
Debbie thinks the gross profit rate can be improved by making
both of the following changes:
1. Increase average selling prices by 17%.This increase is expected
to lower sales volume so that total sales will increase only 8%.
2. Buy merchandise in larger quantities and take all purchase
discounts. These changes are expected to increase the gross profit rate
by 3%.

Debbie does not anticipate that these changes will have any effect on
operating expenses.
Mike thinks expenses can be cut by making both of the following
changes.
1.Cut 2004 sales salaries of $60000 in half and give sales personnel a
commission of 2% of net sales.
2.Reduce store deliveries to one day per week rather than twice a
week, this change will reduce 2004 delivery expenses of $40000 by 40%.

Mike feels that these changes will not have any effect on net sales.
Debbie and Mike come to you for help in deciding the best way to
improve net income.

Instructions:
a) Prepare a condensed income statement for 2005 assuming
1) Debbies changes are implemented and
2) Mikes ideas are adopted
b) What is your recommendation to Debbie and Mike?
c) Prepare a condensed income statement for 2005 assuming both sets of
changes are made.

A condensed income statement for 2005 implementing

Debbies ideas

FEDCO DEPARTMENT STORE

Income Statement
For the year ended December 31, 2004

Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Administrative expenses
Net income

$756000
582120
--------------173880
$100000
20000
-----------

120000
--------------$53880
=========

The above income statement is completed using Debbies ideas as all of

his idea are implemented .But Mikes idea is not used as his ideas are
adopted which are not implemented.

A condensed income statement for 2005 implementing Mikes

ideas

FEDCO DEPARTMENT STORE

Income Statement
For the year ended December 31, 2004

Net sales
Cost of goods sold

$700000
560000
----------140000

Gross profit
Operating expenses:
Selling expenses:
Salaries expense ($60000*1/2)
Sale commission expense ($700000*2%)
Delivery expense ($40000*60%)

$30000
14000
24000

Total selling expenses

68000

Administrative expenses

20000

Total operating expenses

Net income

88000
--------------$52000
=========

The above income statement is completed using Mikes ideas as all of his
idea are implemented .But Debbies ideas are not used.

RECOMMENDATION
From the income statement of 2004 0f Fedco Department Store we find
that net income of the organization was $20000.
But in the income statement of 2005 which we completed by using
Debbies ideas, net income is $53880, which is increased 169.4% than
the previous net income.
And from the second income statement where we use Mikes ideas, net
income is $52000, which is increased 160% than the previous net
income.
After analyzing the net income of both of the income statement and
compare both of it with the previous income statement, we can say that
by increasing average selling prices and decreasing sales discount and
sales return instead of, decreasing operating expense we can increase
our net income.

But if we are able to increase average sales and on the same

time reduce operating expense it will also help us to gain more
profit.

CONDENSED INCOME STATEMENT ASSUMING BOTH

SETS OF PROPOSED CHANGES

FEDCO DEPARTMENT STORE

Income Statement
For the year ended December 31, 2004

Net sales
Less: Cost of goods sold

$756000
582120
-----------$173880

Gross profit
Less: Operating expenses
Selling expenses:
Salaries expense (60,000*1/2)
$30000
Sales commission expenses ($756000*2%) 15120
Delivery expense (40,000*60%)
24000
Total selling expenses

69120

Administrative expenses

20000
89120
--------------$84760
=========

Net income

------0------