Question

Lemon Auto Wholesalers had sales of $1,310,000 last year, and cost of goods sold represented 77 percent of sales. Selling and administrative expenses were 13 percent of sales. Depreciation expense was $11,000 and interest expense for the year was $11,000. The firm’s tax rate is 30 percent. a. Compute earnings after taxes. b-1. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 15 percent of sales, sales can be increased to $1,360,600. The extra sales effort will also reduce cost of goods sold to 73 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at $11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $18,200. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. (Round taxes and earnings after taxes to 1 decimal place.) b-2. Will her ideas increase or decrease profitability? Increase profitability Decrease profitability

Answer 1

a)	Sales	$ 13,10,000.0
	Cost of goods sold at 77% of sales	$ 10,08,700.0
	Selling and administrative expenses at 13% of sales	$     1,70,300.0
	Depreciation expense	$        11,000.0
	Interest expense	$        11,000.0
	Income before tax	$     1,09,000.0
	Tax at 30%	$        32,700.0
	Net income	$        76,300.0
	Profit margin = NI/Sales =	5.82%
b-1)	Sales	$ 13,60,600.0
	Cost of goods sold at 73% of sales	$     9,93,238.0
	Selling and administrative expenses at 15% of sales	$     2,04,090.0
	Depreciation expense	$        11,000.0
	Interest expense	$        18,200.0
	Income before tax	$     1,34,072.0
	Tax at 30%	$        40,221.6
	Net income	$        93,850.4
	Profit margin = NI/Sales =	6.90%
b-2)	Yes, her ideas will increase profitability.
	The profits increase from $76300.00 to $93,850.40
	The profit margin also increases from 5.82% to 6.90%.