Reference no: EM13554966

Your sister operates Budget Parts Company, an online boat parts distributorship that is in its third year of operation. The income statement is shown below and was recently prepared for the year ended July 31, 2012.


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 allowed and merchandise is shipped FOB destination. It is estimated that these credit terms will increase net sales by 15%. The ratio of the cost of merchandise sold to net sales is expected to be 60%. 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

July 31, 2012, were as follows:
Store supplies expense$9,000
Miscellaneous selling expense 2,400
Office supplies expense 2,000
Miscellaneous administrative expense 1,000

The other income and other expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all deliver expenses, which for the year ended July 31, 2012, were $12,000.

1. Prepare a projected single-step income statement for the year ending July 31, 2013, 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 implementation of the proposed changes?

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