Net sales                                                        $700,000 Cost of goods sold                                          560,000 Gross profit                                                     140,000 Operating expenses Selling expenses                                             $100,000 Administrative expenses                                   20,000                                                                          120,000 Net income                                                     $ 20,000   Karen believes the problem lies in the relatively low gross profit rate of 20%. Reece believes the problem is that operating expenses are too high. Karen thinks the gross profit rate can be improved by making two changes. She does not anticipate that these changes will have any effect on operating expenses. Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. Buy merchandise in larger quantities and take all purchase discounts. These changes to selling price and purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%. Reece thinks expenses can be cut by making these two changes. He feels that these changes will not have any effect on net sales. Cut 2023 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales. Reduce store deliveries to one day per week rather than twice a week. This change will reduce 2023 delivery expenses of $40,000 by 40%. Karen and Reece come to you for help in deciding the best way to improve net income. Instructions With the class divided into groups, answer the following. Prepare a condensed income statement for 2023 assuming (1) Karen's changes are implemented and (2) Reece's ideas are adopted. What is your recommendation to Karen and Reece? Prepare a condensed income statement for 2023 assuming both sets of proposed changes are made. Discuss the impact that other factors might have. For example, would increasing the quantity of inventory increase costs? Would a salary cut affect employee morale? Would decreased morale affect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered?

Net sales                                                        $700,000

Cost of goods sold                                          560,000

Gross profit                                                     140,000

Operating expenses

Selling expenses                                             $100,000

Administrative expenses                                   20,000

                                                                         120,000

Net income                                                     $ 20,000

Karen believes the problem lies in the relatively low gross profit rate of 20%. Reece believes the problem is that operating expenses are too high.

Karen thinks the gross profit rate can be improved by making two changes. She does not anticipate that these changes will have any effect on operating expenses.

1. Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%.
2. Buy merchandise in larger quantities and take all purchase discounts. These changes to selling price and purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%.

Reece thinks expenses can be cut by making these two changes. He feels that these changes will not have any effect on net sales.

1. Cut 2023 sales salaries of $60,000 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 2023 delivery expenses of $40,000 by 40%.

Karen and Reece come to you for help in deciding the best way to improve net income.

Instructions

With the class divided into groups, answer the following.

1. Prepare a condensed income statement for 2023 assuming (1) Karen's changes are implemented and (2) Reece's ideas are adopted.
2. What is your recommendation to Karen and Reece?
3. Prepare a condensed income statement for 2023 assuming both sets of proposed changes are made.
4. Discuss the impact that other factors might have. For example, would increasing the quantity of inventory increase costs? Would a salary cut affect employee morale? Would decreased morale affect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered?