Lemon Auto Wholesalers had sales of $1,080,000 last year, and cost of goods sold

Question

Lemon Auto Wholesalers had sales of $1,080,000 last year, and cost of goods sold represented 77 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was $13,000 and interest expense for the year was $11,000. The firm’s tax rate is 30 percent.

a. Compute earnings after taxes.
Gross profit=

operating profit=

earnings before taxes=

earnings after taxed=

b-1. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to $1,130,200. The extra sales effort will also reduce cost of goods sold to 73 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at $13,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $18,800. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. (Round taxes and earnings after taxes to 1 decimal place.)
Gross profit=

operating profit=

earnings before taxes=

earnings after taxes=

Explanation / Answer

(a)

(b)

Sales 10,80,000 COGS 831,600 Gross profit 248,400 Selling expense 129,600 Depreciation 13,000 Operating profit 105,800 Interest expense 11,000 Earnings before tax 94,800 Taxes 28,440 Earnings after tax 66,360

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