Fundamentals of Financial Accounting

Your response should be 2-3 paragraphs and incorporate at least one outside reference. You will NOT be able to see others responses until you make the initial posting. You are then encouraged to engage in the discussion as frequently as possible. Use Citation!!!! Book title: Accounting Tools for Business Decisions with WileyPlus Edition: 7th Author(s): Kimmel ISBN: 9781119598381

Three years ago, Karen Suez and her brother-in-law Reece Jones opened Gigasales Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2022 were disappointing.

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Gigasales Department Store

Income Statement

For the Year Ended December 31, 2022

Net sales   $700,000
Cost of goods sold   560,000
Gross profit   140,000
Operating expenses    
Selling expenses   $100,000  
Administrative expenses   20,000
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.

What is your recommendation to Karen and Reece? 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?

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