Case mba 503 1

BYP 5-4
(a) (1)

FEDCO DEPARTMENT STORE Income Statement
For the Year Ended December 31, 2010

Net sales $742,000
Cost of goods sold 563,920 ................
Gross profit: 178,080 Operating expenses:
Selling expenses $100,000
Administrative expenses 20,000 ................ Total operating expenses: 120,000
...............
Net income: $ 58,080 ========

(2)

FEDCO DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2010

Net sales $700,000
Cost of goods sold 553,000
...............
Gross profit 147,000
Operating expenses
Selling expenses $72,000*
Administrative expenses 20,000* ...............
Total operating expenses: 92,000
...............
Net income $ 55,000 ========

(b)

Thus the recommendation to Carrie and Luke, if the choice is between Carrie’s plan and Luke’s plan, Carrie’s plan should be adopted. Carrie’s proposed changes will increase net income. Luke’s proposed changes will reduce operating expenses and increase net income. While Luke’s plan will increase net income, it may also have an adverse effect on sales personnel.

(c)

FEDCO DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2010

Net sales $742,000
Cost of goods sold 563,920 ...............
Gross profit: 178,080
Operating expenses
Selling expenses $72,840*
Administrative expenses 20,000*
...............
Total operating expenses: 92,840 ...............
Net income: $ 85,240