Exercise 13-1 Common-Size Income Statement LO13-1] A comparative income statemen

Question

Exercise 13-1 Common-Size Income Statement LO13-1] A comparative income statement is given below for McKenzie Sales, Ltd., of Toronto McKenzie Sales, Ltd. Comparative Income Statement This Year Last Year $7,390,000 $5,616,400 4,780,000 3,512,500 Sales Cost of goods sold Gross margin Selling and administrative expenses 2,610,000 2,103,900 Selling expenses 1,388,000 1,076,000 711,000 Administrative expenses Total expenses Net operating income 611,500 2,099,000 1,687,500 416,400 511,000 105,000 Interest expense 92,000 Net income before taxes $406,000 $ 324,400 Members of the company's board of directors are surprised to see that net income increased by only $81,600 when sales increased by $1,773,600 Required 1. Express each year's income statement in common-size percentages. (Round your percentage answers to 1 decimal place i.e., 0.1234 should be entered as 12.3). This Year Last Year Sales Cost of goods sold Gross margin Selng and administrative expenses 0.0% 0.01% Selling expenses Administrative expenses Total selling and administrative expenses Net operating income Interest expense Net income before taxes 0.01% 0.01% 0.01% 0.0% 0.01% 0.01%

Explanation / Answer

McKenzie Sales Ltd. Common-size Income Statement This Year Last Year This Year $ Last Year $ Variance $ Variance % Sales      100.0 %      100.0 %      7,390,000    5,616,400 1,773,600            31.6 Cost of goods sold        64.7 %        62.5 %      4,780,000    3,512,500 1,267,500            36.1 Gross margin        35.3 %        37.5 %      2,610,000    2,103,900     506,100            24.1 Selling and Administrative expenses:             -   Selling expenses        18.8 %        19.2 %      1,388,000    1,076,000     312,000            29.0 Administrative expenses          9.6 %        10.9 %        711,000      611,500       99,500            16.3 Total Expenses        28.4 %        30.0 %      2,099,000    1,687,500     411,500            24.4 Net Operating Income          6.9 %          7.4 %        511,000      416,400       94,600            22.7 Interest Expense          1.4 %          1.6 %        105,000        92,000       13,000            14.1 Net Income before taxes          5.5 %          5.8 %        406,000      324,400       81,600            25.2 Explanation: 1 There has been an increase in sales by $ 1,773,600 which is 31.6% compared to last year but at the same time net income increase is just 25.2%. 2 The main reason for decrease in profits is the increase in Cost of Goods sold (COGS). COGS in the current year are 64.7% of sales as compared to last year of 62.5% which is $ 1,267,500 and consequently reducing gross margin. 3 Selling and Administrative and Interest expenses have slightly reduced compared to last year. 4 Lastly net income is 5.5% of sales which was at 5.8% last year.

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