Question

Question:Suppose you manage Campbell Appliance. The store’s summarized financial statements for 2019, the most recent year, follow:

CAMPBELL APPLIANCE
Income Statement
Year Ended December 31, 2019
Net Sales Revenue		\( 800,000
Cost of Goods Sold		660,000
Gross Profit		140,000
Operating Expenses		100,000
Net Income		\) 40,000

CAMPBELL APPLIANCE
Balance Sheet
December 31, 2019
Assets	Liabilities and Stockholders’ Equity
Cash	\( 30,000	Accounts Payable	\) 35,000
Inventories	75,000	Note Payable	280,000
Land and Building, Net	360,000	Total Liabilities	315,000
		Stockholders’ Equity	150,000
Total Assets	\( 465,000	Total Liabilities and Stockholders’ Equity	\) 465,000

Assume that you need to double net income. To accomplish your goal, it will be very difficult to raise the sales prices you charge because there is a discount appliance store nearby. Also, you have little control over your cost of goods sold because the appliance manufacturers set the amount you must pay.

Identify several strategies for doubling net income.

Short answer

Answer

Net income can be doubled by adopting the right inventory valuation technique, controlling indirect expenses, providing sales incentives, and building trust among customers.

Step-by-step solution

Inventory Valuation

Inventory valuation is a technique of valuing inventory on hand and inventory sold based on the assumption of issuing orders. This issuing order can be – first-in-first-out, last-in-first-out, average value, or specific identification.

Under any method it is assumed that the inventories have been issued as per this order only and so ending inventory is also valued on that basis.

Strategies for doubling net income

In the given case, several strategies for doubling net income are as follows –

1. Adoption of the right inventory valuation method –different inventory valuation methods provide different values for ending inventory and cost of goods sold.

(a) Under a first-in-first-out basis, the issued inventories are valued at historical prices. Thus in case of a rising price trend, the FIFO method would provide the least value for the cost of goods sold and the highest value for ending inventory.

(b) Under the last-in-first-out method, the issued inventories are valued at current prices. Thus in the case of a rising price trend, the LIFO method would provide the highest value for the cost of goods sold and the least value for ending inventory.

(c) Average method provides a middle value for COGS and ending inventory and the specific identification method provides a method as per the inventory specified.

Thus the right inventory method under rising or falling pricing trends would provide the appropriate cost of goods sold that would increase or decrease the net income from the former practice. The right inventory valuation method can boost net income two to three folds.

2. Providing sales incentives – Sales incentives are the discounts and coupons that are given to customers for purchasing in lots. This is a method to increase sales volume. By increasing sales volume a company can double its net income without affecting the sales price.

3. Controlling the indirect expenses – Indirect expenses are the overheads that are incurred to support the manufacturing or sales activity. These expenses are not directly associated with the production or sales but help in conducting them. After COGS, these expenses make up most of the total cost. A strategic reduction in the overhead cost can help in doubling net income.

4. Other tactics – Other tactics like marketing campaigning, brand building, and making loyal customers can also play a pivotal role in doubling net income.