Refer to the opening feature about Chipotle. Chipotle has a small segment of its business devoted to merchandising shirts, mugs, hats, and other related items tied to its branding strategy. Assume that its merchandising segment has current annual sales of approximately $1 million and it prepares the following income statement.This segment sells to individuals and retailers, ranging from small shops to large chains. Assume that it currently offers credit terms of 1/15, n/60, and ships FOB destination. To improve cash flow, it is considering changing credit terms to 3/10, n/30. In addition, it proposes to change shipping terms to FOB shipping point. The segment's manager expects that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. The segment's manager also expects that delivery expenses will be zero under this proposal; thus, expenses other than cost of sales are expected to increase only 6%.
Required
Prepare a forecasted income statement for the year ended January 31, 2016, based on the proposal.
Based on the forecasted income statement alone (from your part 1 solution), do you recommend that Chipotle implement the new sales policies? Explain.
What else should Chipotle consider before deciding whether or not to implement the new policies? Explain.
