Question

Linden Corp. has a 10% market share in its industry. Below are income statements ($M) for Linden and for the industry.

	Linden		Industry
Sales	$6,000		$62,000
Cost of Goods Sold	3,400		30,155
Gross Margin	2,600		31,845
Expenses:
Sales and Marketing	430		3,850
Engineering	225		2,650
Finance and Administration	650		4,560
Total Expenses	1,305		11,060
EBIT	1,295		20,785
Interest Expense	230		4,500
EBT	1,065		16,285
Tax	500		5,620
Net Income	565		10,665

1. Develop common sized income statements for Linden and the industry as a whole. Round the answers to 2 decimal places.

   	Linden	%	Industry	%
   Sales	$6,000		$62,000
   Cost of Goods Sold	3,400		30,155
   Gross Margin	2,600		31,845
   Expenses:
   Sales and Marketing	430		3,850
   Engineering	225		2,650
   Finance and Administration	650		4,560
   Total Expenses	1,305		11,060
   EBIT	1,295		20,785
   Interest Expense	230		4,500
   EBT	1,065		16,285
   Tax	500		5,620
   Net Income	565		10,665

2. What areas should management focus on to improve performance, and what kind of issues should be examined or looked for in each area? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

a)	Common size income statement for Linden Corp and industry as a whole
		Linden Corp ($)	%	Industry ($)	%
	Sales	6000	100.00%	62000	100.00%
	Cost of goods sold	3400	56.67%	30155	48.64%
	Gross margin	2600	43.33%	31845	51.36%
	Expenses:
	Sales and marketing	430	7.17%	3850	6.21%
	Engineering	225	3.75%	2650	4.27%
	Finance and Administration	650	10.83%	4560	7.35%
	Total expenses	1305	21.75%	11060	17.84%
	EBIT	1295	21.58%	20785	33.52%
	Interest	230	3.83%	4500	7.26%
	EBT	1065	17.75%	16285	26.27%
	Tax	500	8.33%	5620	9.06%
	Net income	565	9.42%	10665	17.20%
b)	Areas in which management should focus in order to improve performance are:-
i)	The total expenses of Linden Corp is higher than the industry average, therefore in order to improve profitability management should use the funds more diligently and avoid unnecessary expenses. Further management should also examine the nature of expenses in order to identify non relevant expenses.
ii)	The cost of goods sold is very high in comparison to the industry standards so the management should deploy adequate cost control measures or new technology in order to lower the cost and increase its profitability. The management should examine its suppliers and their contracts and negotiate with them in order to get supplies at reduced prices.