Problem

Bathrooms, Inc., manufactures bathroom equipment. Shown below for the current year are the...

Bathrooms, Inc., manufactures bathroom equipment. Shown below for the current year are the income statements 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 Bathrooms. Inc., but are average percentages for the industry.)

 

Bathrooms, Inc.

Industry Average

Sales (net)

  $12,000,000

100%

Cost of goods sold 

  7,320,000

70

Gross profit on sales  

   $ 4,680,000

30%

Operating expenses:

 

 

Selling 

  $ 1,800,000

10%

General and administrative 

  720,000

14

Total operating expenses

  $ 2,520,000

24%

Operating income

  $ 2.160,000

6%

Income tax expense

   120,000

2

Net income    

  $ 2,040.000

4%

Return on assets  

  20%

12%

Instructions

a. Prepare a two-column common size income statement. The first column should show for Bathrooms, 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 Bathrooms, Inc., with the aver­age for the industry. (Round to the nearest percent)


b. Comment specifically on differences between Bathrooms, 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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