Question

CASE STUDY

TABLE # 1

TwoSan Department Store

Statement of Income

Amounts in Philippine Peso

For the Year Ended December 31, 2018		PROPOSED for 2019 (Requirements)
ACTUAL		(a) JAMILLA’s	(b) MARTIN’s	( c ) Both Sets
Sales	7,000,000
Cost of Sales	5,600,000
Gross Profit	1,400,000
Expenses
Selling Expenses	(1,000,000)
Administrative Expenses	(200,000)
Net Income	200,000

Table #2

PROPORTIONS	STAKEHOLHER(s) SIGNIFICANTLY AFFECTED (s) SIGNIFICANTLY AFFECTED (Requirement #2)
J1: Increase average selling price with corresponding reduction on sales volume
J2: Buy inventory in large quantities and take all purchase discounts
M1: Cut 2018 sales salaries in half and give sales personnel a 2% sales commission
M2: Reduce store deliveries to one day per week rather than twice a week

Requirements #3: RECOMMENDATION

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Case Analysis

Three years ago, Jamilla Santos and her brother-in-law, Martin San Diego opened the TwoSan Department Store. For the first 2 years, business was good, but the condensed profit results for 2018 were not satisfactory (refer to the attached Statement of Income).

Jamilla believe the problem lies in the relatively low gross profit (gross profit divided by sales) of %. She thinks that the gross profit ratio can improved by making both of the following changes:

1. Increase average selling price of 17%; but this increase is expected to lower sales volume, so total sales will increase only by 8%.
2. Buy inventory in large quantities and take all purchase discounts. These changes are expected to increase the gross profit by 3%.

Jamilla does not anticipate that these changes will have any effect on expenses.

Martin, on the other hand believes the problem is that operating expenses are too high. Martin thinks that expenses can be cut by making both of the following changes:

1. Cut 2018 sales salaries pf P600,000 in half and give sales personnel a commission of 2% of sales.
2. Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2018 delivery expense of P400,000 by 40%. Sales Salaries and Delivery Expenses make up the Selling Expenses in the Statement of Income.

Martin feels that these changes will not have any effect on Sales.

Jamilla and Martin come to you for help in deciding the best way to improve profit.

Required:

1. Append your answers to the attached Actual Income performance (Table #1). Present how Income for 2019 will change assuming:

1. Jamilla’s changes are implemented;
2. Martin’s ideas are adopted;
3. Both sets of proposed changes are made,

2. For each of Jamilla and Martin’s propositions, Identify at least one among the business entity’s stakeholders who would be significantly affected by the implementation of the prepositions. Write your answers to the provided spaces in Table #2
3. Give a brief recommendation to Jamilla and Martin. One sentence stating the recommended course of action (from among the options stated in #1); and at most two more sentences concisely explaining why. Refer to the results of your income sensitively analysis (#1) and the impact to stakeholders (#2) in justifying your recommendation.

Answer 1

Table 1

Particulars	Actual for the Year'2018	PROPOSED For the Year'2018
		Jamilla's	Martin's	Both Sets
Sales	7000000	7560000	7000000	7560000
Cost of Sales	(5600000)	(5558000)	(5200000)	(5200000)
Gross Profit	1400000	2002000	1800000	2360000
Expenses
Selling Expense	(1000000)	(1000000)	(840000)	(840000)
Administrative Expense	(200000)	(200000)	(200000)	(200000)
Net Income	200000	802000	760000	1320000
Gross Profit	20%	26.481%	25.714%	31.217%
Net Profit	2.857%	10.608%	10.857%	17.460%

Table 2

Proportions	STAKEHOLHER(s) SIGNIFICANTLY AFFECTED (s) SIGNIFICANTLY AFFECTED
J1: Increase average selling price with corresponding reduction on sales volume	Store's client (customer) will be affected as they will have to pay more price for the same product.
J2: Buy inventory in large quantities and take all purchase discounts	Small suppliers as well as transporter as large quantity order will be placed either once or twice in the year acording to the requirements.
M1: Cut 2018 sales salaries in half and give sales personnel a 2% sales commission	it will affect employee as store have increased sale price hence demand will decrease so employee will get less commission.
M2: Reduce store deliveries to one day per week rather than twice a week	it will affect transporter.

Recomendations:

According to given in question, in gross profit ratio is higher in proposition of Jamilla as compared to Martin but the net effect (net income ratio) is higher in Martin's Proposition. Combining both the propositions will give more gross profit ratio as well as net profit ratio.

Workings:-

(a) In caes of Jamill's

1. Sales (increase in total sales by 8%)= 7000000*1.08 = 7560000.

2. Cost of Sales (increased in profit due to purchase discount reduced)= 5600000 - (1400000*3%) = 5558000.

(b) In case of Martin

1.Cost of Sale= 5600000-400000 = 5200000.

2.Selling Expense= (1000000-600000) + (600000*1/2) + (7000000*2%) = 840000.