Your sister operates Callender Parts Company, a mail-order boat parts distributorship that is in its third year of operation. The following income statement was recently prepared for the year ended March 31, 2006:

 

 

 

 

 

 

Revenues: Net sales	Â	  $960,000
Interest  revenue	Â	      8,000
Total revenues Expenses: Cost of merchandise sold	    $672,000	$968,000
Selling expenses	105,600	Â
Administrative expenses	54,400	Â
Interest expense Total expenses	  16,000	    848,000
Net income	Â	$120,000

 

 

 

Your sister is considering a proposal to increase net income by offering sales discounts of 2/15, n/30, and by shipping all merchandise FOB shipping point. Currently, no sales discounts are al- lowed and merchandise is shipped FOB destination. It is estimated that these credit terms will increase net sales by 10%. The ratio of the cost of merchandise sold to net sales is expected to be 70%. All selling and administrative expenses are expected to remain unchanged, except for store supplies, miscellaneous selling, office supplies, and miscellaneous administrative expenses, which are expected to increase proportionately with increased net sales. The amounts of these preceding items for the year ended March 31, 2006, were as   follows:

 

 

Store  supplies expense	$8,000
Miscellaneous selling expense	3,200
Office supplies expense	1,600
Miscellaneous administrative expense	2,880

 

The other income and other expense items will remain unchanged. The shipment of all mer- chandise FOB shipping point will eliminate all transportation out expenses, which for the year ended March 31, 2006, were  $32,240.

 

 

 

 

1.        Prepare a projected single-step income statement for the year ending March 31, 2007, based on the proposal. Assume all sales are collected within the discount period.

2.        a.     Based on the projected income statement in (1), would you recommend the implemen- tation of the proposed changes?

b.     Describe any possible concerns you may have related to the proposed changes described in (1).