Question

Sales ........ For 2016, Indigo Company initiated a sales promotion campaign that included the expenditure of an additional $39,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement: Indigo Company Comparative Income Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Sales $820,000 $600,000 Cost of goods sold............ 311,600 240,000 Gross profit ............... $508,400 $360,000 Selling expenses ............... $164,000 $108,000 Administrative expenses......... 57,400 54,000 Total operating expenses ......... $221,400 $162,000 Income from operations .......... $287,000 $198,000 Other income... 65,600 48,000 Income before income tax ....... $352,600 $246,000 Income tax expense.... 246,000 180,000 Net income... $106,600 $ 66,000 Instructions 1. Prepare a comparative income statement for the two-year period, presenting an analy- sis of each item in relationship to sales for each of the years. Round to one decimal place. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1),

Answer 1

1.

Indigo Company
Vertical Analysis
For the Years Ended December 31, 2016 and 2015
	2016	2015
Sales	100.0%	100.0%
Cost of goods sold	38.0%	40.0%
Gross profit	62.0%	60.0%
Selling expenses	20.0%	18.0%
Administrative expenses	7.0%	9.0%
Total operating expenses	27.0%	27.0%
Income from operations	35.0%	33.0%
Other income	8.0%	8.0%
Income before income tax	43.0%	41.0%
Income tax expense	30.0%	30.0%
Net income	13.0%	11.0%

2. The cost of goods sold for 2016 decreased by 2% resulting in a proportional increase in the gross profit. Though there was an increase in the selling expenses from 18% to 20% due to the additional expenditure for advertising, there was a drop in the administrative expenses by 2% thereby causing the total operating expenses to remain unchanged from 2015 at 27%. There was thus an increase in the income from operations. The other income and income tax expense remaining constant in both years, there was an increase in the income before income tax and the net income.