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	$	7,370,000		$	5,601,200
Cost of goods sold		4,700,000			3,508,500
Gross margin		2,670,000			2,092,700
Selling and administrative expenses:
Selling expenses		1,396,000			1,079,000
Administrative expenses		706,000			616,000
Total expenses		2,102,000			1,695,000
Net operating income		568,000			397,700
Interest expense		105,000			88,000
Net income before taxes	$	463,000		$	309,700

Members of the company’s board of directors are surprised to see that net income increased by only $153,300 when sales increased by $1,768,800.

Required:
1.	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

An income statement in which each account is expressed as a percentage of the value of sales

	C	P	C-P	common-size percentages
	This Year	Last Year	Growth	This Year	Last Year
Sales	7370000	5601200	1768800	100.0%	100.0%
Cost of goods sold	4700000	3508500	1191500	63.8%	62.6%
Gross margin	2670000	2092700	577300	36.2%	37.4%
Selling and administrative expenses:
Selling expenses	1396000	1079000	317000	18.9%	19.3%
Administrative expenses	706000	616000	90000	9.6%	11.0%
Total expenses	2102000	1695000	407000	28.5%	30.3%
Net operating income	568000	397700	170300	7.7%	7.1%
Interest expense	105000	88000	17000	1.4%	1.6%
Net income before taxes	4,63,000	309700	153300	6.3%	5.5%

This shows that Company has improved on Profit margin compared to last year ie Sales increaed in actual, Expenses in % of sales have decreased however Gross Margin has decreased with Cost of good sold % going up