Question

A comparative income statement is given below for McKenzie Sales, Ltd., of Toronto:

McKenzie Sales, Ltd.
Comparative Income Statement
This Year Last Year
Sales $8,000,000 $6,000,000
Cost of goods sold 4,984,000 3,516,000
Gross margin 3,016,000 2,484,000
Selling and administrative expenses:
Selling expenses 1,480,000 1,092,000
Administrative expenses 712,000 618,000
Total expenses 2,192,000 1,710,000
Net operating income 824,000 774,000
Interest expense 96,000 84,000
Net income before taxes $728,000 $690,000
Members of the company’s board of directors are surprised to see that net income increased by only $38,000 when sales increased by two million dollars.

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).)

Answer 1

To express each year's income statement in common-size percentages, calculate the percentages for each line item relative to the total sales. For example, in the current year, the cost of goods sold is 62.3% of sales. Similarly, in the last year, the cost of goods sold is 58.6% of sales.

Step-by-step explanation:

To express each year's income statement in common-size percentages, you need to calculate the percentages of each line item relative to the total sales. Here's the calculation for the current year:

Sales = $8,000,000
Cost of goods sold = $4,984,000 / $8,000,000 * 100 = 62.3%
Gross margin = $3,016,000 / $8,000,000 * 100 = 37.7%
Selling expenses = $1,480,000 / $8,000,000 * 100 = 18.5%
Administrative expenses = $712,000 / $8,000,000 * 100 = 8.9%
Net operating income = $824,000 / $8,000,000 * 100 = 10.3%
Interest expense = $96,000 / $8,000,000 * 100 = 1.2%
Net income before taxes = $728,000 / $8,000,000 * 100 = 9.1%

Similarly, for the last year:

Cost of goods sold = $3,516,000 / $6,000,000 * 100 = 58.6%
Gross margin = $2,484,000 / $6,000,000 * 100 = 41.4%
Selling expenses = $1,092,000 / $6,000,000 * 100 = 18.2%
Administrative expenses = $618,000 / $6,000,000 * 100 = 10.3%
Net operating income = $774,000 / $6,000,000 * 100 = 12.9%
Interest expense = $84,000 / $6,000,000 * 100 = 1.4%
Net income before taxes = $690,000 / $6,000,000 * 100 = 11.5%