Question

Gigasales Department Store Income Statement For the Year Ended December 31, 2022 Net sales $700,000 560.000 140,000 Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expenses $100,000 20.000 120.000 Net income $ 20,000

Both agree that the gross profit rate of 20% is too low. Karen thinks that this is because of the high 25% markdown they offered during the Spring liquidation sale. (The markdown was 10% higher than before.) Reece feels that it is because of their newly adopted free delivery policy.

Based on what you have learned from chapter 5 reading, whose statement is correct? Why? Note that gross profit rate is Gross Profit÷Net Sales.

1. Make a post about whether you agree with Karen or Reece, or neither, or both about the drop in the gross profit rate. You MUST explain! (Note that markdown is to reduce the selling price directly; it is not the same as "sales discounts" (e.g. 2/10, n/30) even though they have the same impacts on the gross profit rate!) Also, gross profit rate (=$Gross profit ÷ $Net sales) is the amount of gross profit per dollar of sales. So, the volume of sales that might increase due to cutting price or offering free shipping does not matter for this discussion on the gross profit rate. Focus on Financial reporting.

Answer 1

Karen is correct.

Gross profit is the relationship between Net Sales and Cost of Goods Sold.

Gross Profit = Net Sales - Cost of Goods Sold.

Markdowns would cause net sales to decease, and the gross profit rate to be lower. Therefore, the high 25 % markdown is the most likely cause.

Reece is completely incorrect, as delivery expense is part of selling expense, which is a period expense, which affects neither sales nor cost of goods sold. Delivery expense is not a product cost. It is charged after gross profit on the income statement. Therefore, whether it is $ 0 or whether it is $ 10,000, delivery expense does not impact the gross profit rate. The effect of the free delivery policy would be felt on the net income, not gross profit.