Question

OAKBROOK COMPANY Comparative Income Statements For Years Ended December 31, 2017 and 2016

	2017		2016
Sales	$ 980		$ 850
Less cost of goods sold	525		415
Gross profit	455		435
Less operating expenses:
Wage expense	90		88
Depreciation expense	18		12
Rent expense	23		20
Miscellaneous expense	24		36
Total operating expenses	155		156
Operating income	300		279
Less other expenses:
Interest	9		33
Income before tax	291		246
Less income tax expense	116		98
Net income	$ 175		$ 148

In the judgment of the credit analysts of Oakbrook Company, what issue would be of most concern or source of optimism?

Select one:

A. Income taxes increased 18.3 percent.

B. There was a 10.0 percent increase in income before taxes.

C. There was a 26.5 percent increase in cost of goods sold with only an 15.3 percent increase in sales.

D. Miscellaneous expense decreased 33.3 percent.

Answer 1

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Let me know in case any issue and query:

Increase in income before tax should be 18.3 percent in option b. Because (291-246)/246; if increase in income tax is 18.3% it should also be the same if tax rate is same.

Answer is highlighted in yellow: Answer: C. There was a 26.5 percent increase in cost of goods sold with only an 15.3 percent increase in sales Explanation: Because, cost of goods sold has direct connection with sales. If this will increase on incremental basis than sales, which will result in an increasement decrease in gross profit in future In this case, cost of goods sold is increasing due to higher cost of additional marginal sales. At a point of time, when due to higher cost of goods sold, gross profit will start giving lower incremental return then it will be good to either control sales price or cost of goods sold.