This problem comes from Managerial Accounting a Focus on Ethical Decision Making 5th edition, Jackson, Sawyer and Jenkins.
You recently began work at Colt Kitchen Ltd. The company is a well-known distributor of gourmet foods. Like many similar companies, Colt Kitchen currently maintains a relatively large warehouse in which a wide variety of products are stored. Most other food wholesalers also maintain large warehouses, however, Sharon Oblinger, the company's president, is very concerned about the company's ability to maintain and sell the freshest products. She has also grown increasingly concerned about the company's cash management practices. She has accumulated the following inventory data:
Spices $28,000
Coffee and Tea 61.060
Pasta 32,140
Vegetables 108,460
Health Supplements 84,700
Dairy 46,975
Meats 185,610
Personal Products 71,440
Household 88,200
Per Care 15,920
Ken Martin, cofounder and chief strategist, is equally concerned about the company, but he believes that specialty food shops that sell the company's products expect to b e able to order items from Colt Kitchen and have them shipped immediately. In short, Ken thinks that maintaining an adequate inventory is crucial to the company's future. Sharon and Ken have set a meeting for late next week to decide on the company's adoption of a just-in-time inventory management system. Sharon is proposing that inventory be reduced by 80 percent and that warehouse employment be decreased by 30 percent. Currently, the 10 warehouse employees earn an average gross pay of $350 per week.
D. Although sales are currently $3.8 million, Ken believes that adopting a just-in-time system will ultimately cause problems such that customers will turn to their wholesalers for their needs. Ken is estimating lost revenues of 20 percent. If the company's gross profit is 30 percent of sales, what impact will the lost revenues have on the company's income statement?