Question

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $50,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement: Tri-Comic Company Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 1 20Y2 20Y1 2 Sales $890,000.00 $600,000.00 3 Cost of goods sold 320,400.00 228,000.00 4 Gross profit $569,600.00 $372,000.00 5 Selling expenses $142,400.00 $84,000.00 6 Administrative expenses 62,300.00 54,000.00 7 Total operating expenses $204,700.00 $138,000.00 8 Income from operations $364,900.00 $234,000.00 9 Other income 80,100.00 54,000.00 10 Income before income tax $445,000.00 $288,000.00 11 Income tax expense 231,400.00 156,000.00 12 Net income $213,600.00 $132,000.00 1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. Round your percentages to one decimal place. Enter all amounts as positive numbers. 2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).

Answer 1

		20Y2		20Y1
Sales	A	$        8,90,000	100.0%	$ 6,00,000	100.0%
COGS	B	$        3,20,400	36.0%	$ 2,28,000	38.0%
Gross Profit	A - B	$        5,69,600	64.0%	$ 3,72,000	62.0%
Selling Expenses	C	$        1,42,400	16.0%	$     84,000	14.0%
Admin Expenses	D	$            62,300	7.0%	$     54,000	9.0%
Total Operating Expenses	C + D	$        2,04,700	23.0%	$ 1,38,000	23.0%
Income from Operations	A - B - C - D	$        3,64,900	41.0%	$ 2,34,000	39.0%
Other Income	E	$            80,100	9.0%	$     54,000	9.0%
Income before taxes	A - B - C - D - E	$        4,45,000	50.0%	$ 2,88,000	48.0%
Income tax expense		$        2,31,400	26.0%	$ 1,56,000	26.0%
Net Income		$        2,13,600	24.0%	$ 1,32,000	22.0%

COGS have comparatively reduced in the current year leading to improved GP margins. The total operating expenses as a percentage of sales are consistent but the composition has changed. While selling expenses have increased, admin expenses have gone down. Other income have remained consistent comparatively. Also, the tax rates are almost same. The company has been able to improve its Net Profit margin as well.