Question

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					$588,000		$4,200,000
Cost of sales		352,800		2,730,000
Gross profit		235,200		1,470,000
Direct expenses		189,000		477,750
Common expenses		84,000		546,000
Total expenses		273,000		1,023,750
Net income (Loss)		$(37,800)		$446,250

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 $31,500 per year, and the common expenses of the firm would be reduced by $7,800. What effect would this action have on Richmond's net income? (Ignore income tax in your calculations.)

Richmond's net income would Answerdecreaseincrease by $Answer

.

c. It is estimated that if an additional $10,500 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

Answer 1

(a)		garden department	all other departments
	Gross profit % (gross profit/sales)	235,200/588,000	1,470,000/4,200,000
		40%	35%
(b)	Income from rented space	31,500
	common exp (84,000-7,800)	76,200
	net income	(44,700)
	net income would reduce by (44,700-37,800) $ 6900
©	sales (588,000+5%)	617,400
	cost of sales	352,800
	gross profit	264,600
	direct exp	189,000
	common exp	84,000
	advertising exp	10,500
	total exp	283,500
	net income ( gross profit - total exp)	(18,900)
	Net income increased by (37,800-18,900)18,900