19.1. Mars company had net sales of $18 million in the year that just ended. Nex

Question

19.1. Mars company had net sales of $18 million in the year that just ended. Next year, the company’s management expects a 15 percent increase in sales. If cost of goods sold is 60 percent of sales and inventory is 25 percent of sales, what would you estimate sales, inventory, and cost of goods sold to be next year?

19.2. Lavaca Inc. management expects net sales to be $855,000, total costs to be $647,000, and to pay taxes at an average rate of 32 percent this year. If the Lavaca pays out 38 percent of its earnings as dividends, what is its retention ratio? How much will Lavaca’s retained earnings increase?

Explanation / Answer

19.1) Next year (in millions) Net sales 20.70 (18*115%) Cost of goods sold 12.42 (20.7*60%) Inventory 5.18 (20.7*25%) 19.2) Net sales 855000.00 Total costs 647000.00 Net income 208000.00 Tax @ 32% 66560.00 Net income after tax 141440.00 Dividends paid @ 38% 53747.20 Net income to be transferred to retained earnings 87692.80 Retention ratio =( Net Income - Dividends) / Net Income                                 = 87692.80 / 141440                                 = 0.62 Retained earnings will increase by 87692.80

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