Question
In: Finance
In a financial statement analysis, you are examining the common-size income statements for the XYZ Metrical...
In a financial statement analysis, you are examining the common-size income statements for the XYZ Metrical Company for the past 5 years and have noticed that the cost of goods as a percentage of sales has been increasing steadily. At the same time, EBIT as a percentage of sales has been decreasing. What might account for the trends in these ratios? What actions might managers take to improve these ratios?
Solutions
Expert Solution
The rise in the ratio of cost of goods to sales and decrease of EBIT to sales ratio shows:
1. The company has been providing discounts of sales.
2. The company has been acquiring costlier goods and could not able to transfer the increase of cost to sales.
3. Other expenses like operating and administrative, has been rising.
4. The company has been operating in recession period and tough competition.
The required action to be taken by the managers in such situations are:
a. Increase the sales without providing any discounts or reducing sales price.
b. Strive for the new customers and selling points, so that the sales would be overhauled in recession.
c. Acquire the goods at the cheapest rate and raises new sources of purchases.
d. Reduces the overheads of the company so that operational and administrative expenses be reduced.
e. bring an attitude of raising the sales and profits among the employees of the company.
f. Regular follow up of the company performance should be there, so that action would be taken at the right time and before incurring of any loss.
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jeff jeffy answered 1 year agoRelated Solutions
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$11,664
$12,554
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355
319
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12,019
12,873
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Cost of goods sold
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30,000
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5,000
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$15,000
Interest expense
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$13,000
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4,000
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4,000
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$9,000
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(amounts in thousands
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2017
2016
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$60,000
$50,000
Cost of goods sold
42,000
30,000
Gross profit
$18,000
$20,000
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9,000
5,000
Operating income
$9,000
$15,000
Interest expense
2,000
2,000
Income before tax
$7,000
$13,000
Income tax expense
2,000
4,000
Net income
$5,000
$9,000
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