Problem

Comparing Operating Results with Average Performance in the IndustryOutdoor World, Inc., m...

Comparing Operating Results with Average Performance in the Industry

Outdoor World, Inc., manufactures camping equipment. Shown below for the current year are the income statement for the company and a common size summary for the industry in which the company operates. (Notice that the percentages in the right-hand column are not for Outdoor World, Inc., but are average percentages for the industry.)

 

Outdoor World, Inc.

Industry Average

Sales (net)

$20,000,000

100%

Cost of goods sold

9,800,000

58

Gross profit on sales

$10,200,000

42 %

Operating expenses:

 

 

Selling

$ 4,200,000

16%

General and administrative

3,400,000

20

Total operating expenses

$ 7,600,000

36 %

Operating income

$ 2,600,000

6%

Income tax expense

1,200,000

3

Net income

$ 1,400,000

3 %

Return on assets

23 %

14 %

Instructions

a. Prepare a two-column common size income statement. The first column should show for Outdoor World, Inc., all items expressed as a percentage of net sales. The second column should show the equivalent industry average for the data given in the problem. The purpose of this common size statement is to compare the operating results of Outdoor World, Inc., with the average for the industry.


b. Comment specifically on differences between Outdoor World, Inc., and the industry average with respect to gross profit on sales, selling expenses, general and administrative expenses, operating income, net income, and return on assets. Suggest possible reasons for the more important disparities.

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