Group Project 2 2 Your sister operates Hercules Parts Company, a mail order boat
ID: 2411066 • Letter: G
Question
Group Project 2 2 Your sister operates Hercules Parts Company, a mail order boat parts distributorship that 3 is in its third year of operations. The following is the single step income statement 4 for the year ended December 31,2016 Hercules Parts Company Income Statement Year Ended December 31, 2016 8 Revenues 9 Net sales revenue $600,000 10 Expenses Cost of goods sold Sales salaries expense Freight out expense (shipping charges) Advertising Expense Office salaries expense Office supplies expense Interest Expense S 420,000 S38,850 20,00000 7,000.00 S 31,200 S 2,800.00 S 10,000.00 12 13 14 15 16 17 18 Total Expenses 19 Net Income $529,850 S 70,150 21 Your sister had the following inventory balances 22 1/01/16 s 38,00000 S 44,000.00 3 12/31/16 S 18,000.00 24 Projected inventory as of 12/31/17 25 26 Your sister is considering a proposal to increase net income by offering their sales representatives a salary commission on every unit they sell This should help increase sales. They also will be able to 28 bargain for a better purchase price for their inventory, control their inventory more efficiently by adopting 29 just-in-time inventory and by shipping all merchandise FOB Shipping Point Presently, all merchandise 30 is shipped FOB Destination. (Assume that the interest expense will remain the same in 2017) t is estimated that more creative marketing (in 2017) wil enable Hercules to have a 20% increase in the 3 Net Sales they had in 2016 by attracting new customers 34 Assume the new shipping terms (in 2017) wil cause Hercules to have 15% decrease in the Net sales they had in 2016 Due to intense negotiations Hercules was able to reduce the cost of goods sold to 65% of Net Sales Assume that Sales Salaries Expense. Advertisina Expense. Office Salaries Expense and Sheetl Sheet2 Sheet3 peess ENTER orExplanation / Answer
Projected Income statement For the year ended December 31, 2017 Particulars Amount Revenue: Net sales revenue $630,000 Less: Cost of goods sold $409,500 Gross Profit $220,500 Operating Expenses: Sales Salaries expenses $42,735 Sales Commission expenses $31,500 Advertising expenses $7,700 Office salaries expenses $34,320 Office supplies expenses $3,080 Total Operating expenses $119,335 Operating Profit $101,165 Non-operating expenses Interest expenses $10,000 Net Profit $91,165 Vertical Analysis Particulars 2017 2016 Revenue: Amount Vertical Analysis Amount Vertical Analysis Net sales revenue $630,000 100% $600,000 100% Less: Cost of goods sold $409,500 65% $420,000 70% Gross Profit $220,500 35% $180,000 30% Operating Expenses: Sales Salaries expenses $42,735 7% $38,850 6% Sales Commission expenses $31,500 5% $0 0% Freight out expenses $20,000 3% Advertising expenses $7,700 1% $7,000 1% Office salaries expenses $34,320 5% $31,200 5% Office supplies expenses $3,080 0% $2,800 0% Total Operating expenses $119,335 19% $99,850 17% Operating Profit $101,165 16% $80,150 13% Non-operating expenses Interest expenses $10,000 2% $10,000 2% Net Profit $91,165 14% $70,150 12% Inventory Turnover ratio = Cost of goods sold/Average inventory 2017 Cost of goods sold $409,500 Average Inventory Beginning Inventory $44,000 Ending Inventory $18,000 Average Inventory (44000+18000/2) $31,000 Inventory Turnover ratio 13 2016 Cost of goods sold $420,000 Average Inventory Beginning Inventory $38,000 Ending Inventory $44,000 Average Inventory (44000+38000/2) $41,000 Inventory Turnover ratio 10 As shown by the inventory turnover ratio calculated above that the inventory turns 13 times in a year, as compared to 10 times in 2016. it appears that the Hercules will do a better job by controlling their inventory. Based on the Projected income statement and vertical analysis, proposed changes are recommended, as the Net profit is increased by 2% and gross profit by 5% due to these changes. Working Notes: Sales $600,000 Add: 20% increase due to marketing $120,000 Less: 15% decrease due to new shipping terms ($90,000) Net sales in 2017 $630,000 Cost of goods sold (630000x 65%) $409,500 Sales commission expenses (630000 x 5%) $31,500 Sales Salaries expenses (38850+3885) $42,735 Advertising expenses (7000+700) $7,700 Office salaries expenses (31200+3120) $34,320 Office supplies expenses (2800+280) $3,080 Freight out charges will be paid by buyer in FOB shipping point, so there will be no shipping charges
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