Question

Analyze Operational Changes
The management of Manchester’s Department Store is concerned about the operation of its sporting goods department, which has not been very successful. The following condensed income statement gives the latest year’s results:

		Sporting Goods Department
				All Other Departments
Sales		$480,000		$2,400,000
Cost of goods sold		360,000		1,560,000
Gross profit		120,000		840,000
Direct expenses		67,500		336,000
Indirect expenses		48,000		240,000
Total expenses		115,500		576,000
Net income (Loss)		$4,500		$264,000

a. Calculate the gross profit percentage for the sporting goods department and for the other departments as a group.

Sporting goods department Answer

Correct
1.00 points out of 1.00

%

All other departments Answer

Correct
1.00 points out of 1.00

%

b. It is estimated that if an additional $10,500 were spent on promotion of sporting goods, average prices can be raised 5% without affecting physical volume of goods sold. What effect would this have on the operating results of the sporting goods department? (Ignore the effect of income tax.)

Use a negative sign to indicate a net loss answer; otherwise do not use negative signs with your answers.

Sporting Goods Department Income Statement
Sales	$Answer Incorrect 0.00 points out of 1.00
Cost of goods sold	Answer Incorrect 0.00 points out of 1.00
Gross profit	Answer Incorrect 0.00 points out of 1.00
Direct expenses	Answer Incorrect 0.00 points out of 1.00
Indirect expenses	Answer Incorrect 0.00 points out of 1.00
Total expenses	Answer Incorrect 0.00 points out of 1.00
Net income (Loss)	$Answer Correct 1.00 points out of 1.00

c. Alternatively, it is estimated that physical volume of goods sold could be increased 8% if an additional $15,000 were spent on promotion of sporting goods and prices were not increased. Assuming that operating expenses remain the same, what effect would this have on the operating results of the sporting goods department? (Ignore the effect of income tax.)

Use a negative sign to indicate a net loss answer; otherwise do not use negative signs with your answers.

Sporting Goods Department Income Statement
Sales	$Answer Incorrect 0.00 points out of 1.00
Cost of goods sold	Answer Incorrect 0.00 points out of 1.00
Gross profit	Answer Incorrect 0.00 points out of 1.00
Direct expenses	Answer Incorrect 0.00 points out of 1.00
Indirect expenses	Answer Incorrect 0.00 points out of 1.00
Total expenses	Answer Incorrect 0.00 points out of 1.00
Net income (Loss)	$Answer

Answer 1

Answer a.

Sporting Goods Department:

Gross Profit Percentage = Gross Profit / Sales
Gross Profit Percentage = $120,000 / $480,000
Gross Profit Percentage = 25%

All Other Departments:

Gross Profit Percentage = Gross Profit / Sales
Gross Profit Percentage = $840,000 / $2,400,000
Gross Profit Percentage = 35%

Answer b.

Increase in Indirect Expenses = $10,500

Increase in Sales = 5% * $480,000
Increase in Sales = $24,000

Answer c.

Increase in Indirect Expenses = $15,000

Increase in Sales = 8% * $480,000
Increase in Sales = $38,400

Increase in Cost of Goods Sold = 8% * $360,000
Increase in Cost of Goods Sold = $28,800