Reference no: EM131788923

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.)