Analyze Operational Changes
Richmond's is a retail store with eight departments, including a
garden department that has been operating at a loss. The following
condensed income statement gives the latest year's operating
results:
Garden Department | All Other Departments | |||
---|---|---|---|---|
Sales | $840,000 | $6,000,000 | ||
Cost of sales | 504,000 | 3,900,000 | ||
Gross profit | 336,000 | 2,100,000 | ||
Direct expenses | 270,000 | 682,500 | ||
Common expenses | 120,000 | 780,000 | ||
Total expenses | 390,000 | 1,462,500 | ||
Net income (Loss) | $(54,000) | $637,500 |
a. Calculate the gross profit percentage for the garden department and for the other departments as a group.
Garden department Answer%
All other departments Answer%
b. Suppose that if the garden department were discontinued, the space occupied could be rented to an outside firm for $45,000 per year, and the common expenses of the firm would be reduced by $11,200. What effect would this action have on Richmond's net income? (Ignore income tax in your calculations.)
Richmond's net income would ANSWER by $Answer.
c. It is estimated that if an additional $15,000 were spent on advertising, prices in the garden center could be raised an average of 5% without a change in physical volume of products sold. What effect would this have on the operating results of the garden department? (Again, ignore income tax in your calculations.)
Use a negative sign to indicate a net loss answer; otherwise do not use negative signs with your answers.
Garden Department Income Statement | |
---|---|
Sales | Answer |
Cost of sales | Answer |
Gross profit | Answer |
Direct expenses | Answer |
Common expenses | Answer |
Total expenses | Answer |
Net income (Loss) | Answer |
a. | ||||
Calculation of gross profit percentage | ||||
Gross profit percentage | Gross profit/Sales revenue | |||
Garden department | 336000/840000 | |||
Garden department | 40.00% | |||
All other department | 2100000/6000000 | |||
All other department | 35.00% | |||
b. | ||||
Calculation of impact on net income for R | ||||
Loss in gross profit | $336,000 | |||
Savings in direct expenses | -$270,000 | |||
Income from renting | -$45,000 | |||
Reduction in common expense | -$11,200 | |||
Decrease in net income | $9,800 | |||
Thus, net income would decrease by $9,800 | ||||
c. | ||||
Calculation of revised operating income for garden department | ||||
Garden Department Income Statement | ||||
Sales | $882,000 | 840000*1.05 | ||
Cost of sales | $504,000 | |||
Gross profit | $378,000 | |||
Direct expenses | $270,000 | |||
Advertising expenses | $15,000 | |||
Common expenses | $120,000 | |||
Total expenses | $405,000 | |||
Net income (Loss) | -$27,000 | |||
The net loss would decrease by $27,000 from $54,000 | ||||
Analyze Operational Changes Richmond's is a retail store with eight departments, including a garden department that...
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