The Fisher Merchandising Company currently sells products only through its store

Question

The Fisher Merchandising Company currently sells products only through its store in Lowell, MA. The company’s expected income statement for store operations in March is presented below.

Fisher Merchandising Company
Income Statement (for Store Operations Only)
For the Month Ended March 31

Sales
$400,000
Cost of Goods Sold
240,000
Gross Profit
$160,000
Operating Expenses
112,000
Income Before Taxes
$48,000
Income Taxes Expense
$16,800
Net Income
$31,200

In addition to continuing its store sales, the Fisher Merchandising Company is considering expanding sales in April by selling through catalogs. The company expects to make catalog sales of $30,000 in April. The company expects its cost of goods sold to continue to average 60% of sales. Catalog operating expenses, other than uncollectible accounts expense, are expected to be 19% of catalog sales. The company’s income taxes rate is expected to continue to average 35% of income before taxes. Although the company collects all its accounts receivable resulting from store sales, it expects to collect only 98% of catalog sales. Determine the expected income before taxes for the company’s April $30,000 catalog sales.

a.
$30,000
b.
$18,000
c.
$5,700
d.
$6,300
e.
$12,000

Explanation / Answer

answer is

c. $5,700

Sales 30000 Cost of Goods Sold 30000*.60 18000 Gross Profit 12000 operating expenses 30000*.19 5700 Bad Debt 30000*(1-.98) 600 Income Before Taxes 5700

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