Problem
Wolford Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company's fiscal year on November 30, 2017, these accounts appeared in its adjusted trial balance.
|
Accounts Payable
|
$ 26,800
|
|
Accounts Receivable
|
17,200
|
|
Accumulated Depreciation-Equipment
|
68,000
|
|
Cash
|
8,000
|
|
Common Stock
|
35,000
|
|
Cost of Goods Sold
|
614,300
|
|
Freight-Out
|
6,200
|
|
Equipment
|
157,000
|
|
Depreciation Expense
|
13,500
|
|
Dividends
|
12,000
|
|
Gain on Disposal of Plant Assets
|
2,000
|
|
Income Tax Expense
|
10,000
|
|
Insurance Expense
|
9,000
|
|
Interest Expense
|
5,000
|
|
Inventory
|
26,200
|
|
Notes Payable
|
43,500
|
|
Prepaid Insurance
|
6,000
|
|
Advertising Expense
|
33,500
|
|
Rent Expense
|
34,000
|
|
Retained Earnings
|
14,200
|
|
Salaries and Wages Expense
|
117,000
|
|
Sales Revenue
|
904,000
|
|
Salaries and Wages Payable
|
6,000
|
|
Sales Returns and Allowances
|
20,000
|
|
Utilities Expense
|
10,600
|
Additional data: Notes payable are due in 2021.
The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. Then, compute the revised profit margin and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)