Your sister operates Hercules Parts Company a mail order boa

Your sister operates Hercules Parts Company, a mail order boat parts distributorship that is in its third year of operations. The following is the single step income statement for the year ended December 31, 2016 Hercules Parts Company Income Statement Year Ended December 31, 2016 Revenues: Net sales revenue Expenses: $ 600,000 Cost of goods sold Sales salaries expense Freight out expense (shipping charg Advertising Expense Office salaries expense Office supplies expense Interest Expense $ 420,000 38,850 20,000.00 $ 7,000.00 $ 31,200 2,800.00 $ 10,000.00 Total Expenses S529,850 70,150 Net Income Your sister had the following inventory balances 1/01/16 12/31/16 Projected inventory as of 12/31/17 $ 38,000.00 $ 44,000.00 $ 18,000.00 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 bargain for a better purchase price for their inventory, control their inventory more efficiently by adopting just-in-time inventory and by shipping all merchandise FOB Shipping Point. Presently, all merchandise is shipped FOB Destination. (Assume that the interest expense will remain the same in 2017) It is estimated that more creative marketing (in 2017) will enable Hercules to have a 20% increase in the Net Sales they had in 2016 by attracting new customers. Assume the new shipping terms (in 2017) will 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, Advertising Expense, Office Salaries Expense and Office suppies Expense will all increase by 10%. Assume that all sales representatives will now receive a 5% comission on every sales dollar. This will create a new expense that we will call Sales Commission Expense. Required: 1. Prepare a projected multiple step income statement for the year ended December 31, 2017. Submit using the Project 2 Working Papers Excel file: Tab parts 1-2 Use the Merchandise Operations vertical analysis video in Module 6 as a guide to prepare the multiple step income statement. 2. Prepare the vertical analysis of the income statement for the two years ended December 31, 2017 and December 31, 2016. Use the Merchandise Operations vertical analysis video in Module 6 as a guide to prepare the analysis. Submit using the Project 2 Working Paper Excel file: Tab Parts 1-2 3. From the projections does it appear that Hercules will do a better job controlling their inventory? Why or Why Not? Include your computation of the inventory turnover for 2017 and 2016 to support the rationale for your answer. Submit using the Project 2 Working Paper Excel file: Tab Parts 3-4 4. Based on your projected income statement and vertical analysis would you recommend the proposed changes? Why or why not? Submit using Tab Parts 3-4 of the Project 2 Working Paper Excel file

Solution

1. Multiple Step Income Statement:

2. Vertical Analysis:

3. Inventory Turnover Ratio = Cost of Good Sold/ Average Stock

Year 2016 = 420,000 / 41000 = 10.25 Times

Year 2017 = 409,500 / 31,000 = 13.21 Times

It appears on the basis of above calculation that despite of increase in sales stock turnover ratio is increased and it show good movement and efficient management of Working Capital

4. We can see Change in profit by 2% as increased due to new initiatives hence we recommend proposed changes to increase sales   

Particulars	Amount in $	Amount in $
Sales Revenue of 2016	600000
Increase due to marketing	120000
Decrease due to new Shipping Term	90000
Net Sales		630000
Expenses
Cost of Good Sold	409500
Sales Salaries Expenses	42735
Freight Out Expenses	0
Advertising Expenses	7700
Office Salary Expenses	34320
Office Supplies Expenses	3080
Interest Expenses	10000
Sales Commission Expenses	31500	538835
Net Income		91,165