Question

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Returi Following are income statements for Hossa Corporation for 20X1 and 20x2. Percentage of sales amounts are also shown for each operating expense Item. Hossa's Income tax rate was 22% in 20X1 and 24% in 20x2. of sales of sales 18 in millions) Sales Cont of sales Other operating expenses Operating income Provision for income taxes Net Income Income tax rate 2001 $ in millions $ 5,500.0 (2,475.0) (925.0) 2,200.0 (484.0) $1,216.0 228 450 150 20x2 3 in millions $ 6,500.0 (3,055.0) (1,040.0) 2,405.0 (577.2) $ 1,027.8 246 478 160 Hossa's management was pleased that 20x2 net income was up 6.5% from the prior year. Although you are also happy with the Increase in net income, you are not so sure the news is all positive. You have modeled Hossa's income as follows: NET INCOME = SALES * (1 - COGS% - OPEX%) * (1 - TAX RATE) Using this model, net income in 20X1 is computed as $5,500 * (1 - 45% – 15%) * (1 - 22%) = $1716.0. Net income in 20X2 is computed as $6,500 * (1 - 47% -16%) * (1 - 24%) = $1,827.8. Required: 1. Prepare a cause-of-change analysis to show the extent to which each of the following items contributed to the $111.8 million increase in Hossa's net income from 20x1 to 20X2: (Do not round Intermediate calculations. Enter your answers in millions rounded to 1 decimal place. Negative amounts should be indicated by a minus sign.) • Increase in sales (SALES) • Increase in cost of sales as a percent of sales (COGS%) • Increase in other operating expenses as a percent of sales (OPEX%) • Increase in income tax rate (TAX RATE)

Answer 1

Requirement 1:

Causes of change in net income
Net income – 20X1				$1,716.0
Effect of increase in sales [$1,000 x (1–45%–15%)] x (1 – 22%)		312.0
Effect of increase in COGS% [$6,500 x 2% x (1–22%)]		(101.4)
Effect of increase in OPEX% [$6,500 x 1% x (1–22%)]		(50.7)
Effect of increase in tax rate [$2,405 x 2%]		(48.1)
Increase in net income				111.8
Net income – 20X2				$1,827.8