The vice president of marketing and the director of human


Problem

Wolford Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company's fiscal year on November 30, 2017, these accounts appeared in its adjusted trial balance.

Accounts Payable

$ 26,800

Accounts Receivable

17,200

Accumulated Depreciation-Equipment

68,000

Cash

8,000

Common Stock

35,000

Cost of Goods Sold

614,300

Freight-Out

6,200

Equipment

157,000

Depreciation Expense

13,500

Dividends

12,000

Gain on Disposal of Plant Assets

2,000

Income Tax Expense

10,000

Insurance Expense

9,000

Interest Expense

5,000

Inventory

26,200

Notes Payable

43,500

Prepaid Insurance

6,000

Advertising Expense

33,500

Rent Expense

34,000

Retained Earnings

14,200

Salaries and Wages Expense

117,000

Sales Revenue

904,000

Salaries and Wages Payable

6,000

Sales Returns and Allowances

20,000

Utilities Expense

10,600

Additional data: Notes payable are due in 2021.

The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. Then, compute the revised profit margin and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)

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HR Management: The vice president of marketing and the director of human
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