2. Develop a profit-and-loss statement for the Westgate division of North Indust

Question

2.

Develop a profit-and-loss statement for the Westgate division of North Industire. This division manufactures light fixtures sold to consumers through home improvement and hardware stores. Cost of goods sold represents 40 percent of net sales. Marketing expenses include selling expenses, promotion expenses, and freight. Selling expenses include sales salaries totaling $3 Million per year and sales comissions (5 percent of sales). The company spent $3 million on adertising last year, and freight costs were 10% of sales. Other costs include $2 million for managerial salaries and expenses for the marketing function and another $3 million for indirect overhead allocated to the division.

a. Develop the profit-and-lost statement if net sales were $20 million last year.

b. Develop the profit-and-lost statement if net sales were $40 million last year.

c. Calculate Westgate's break-even sales.

3.

Using the profit-and-loss statement you developed in question 2.2b, and assuming that Westgats beginning inventory was $11 million, ending inventory was $7 million, and total investment was $20 million including inventory, determine the following:

a. gross margin percentage

b. net profit percentage

c. operating expense percentage

d. inventory turnover rate

e. return on investment (ROI)

f. net marketing contribution

g. marketing return on sales (marketing ROS)

h. marketing return on investment (marketing ROI)

i. Is the Westgate division doing well? Explain your answer.

Explanation / Answer

a. Gross margin percentage = gross margin divided by net sales = $24 million divided by $40 million = 60%

         b. Net profit percentage = net profit divided by net sales = $7 million divided by $40 million = 17.5%

         c. Operating expense percentage = total expenses divided by net sales = $17 million divided by $40 million = 42.5%

         d. Inventory turnover rate = COGS divided by average inventory at cost = $16 million divided by ($11 million + $7 million) divided by 2 = $16 million divided by $9 million = 1.78

         e. Return on investment = net profit before taxes divided by investment = $7 million divided by $20 million = 35%

         f. NMC = net sales

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