Problem

Comparing Operating Results with Average Performance in the IndustryDecor, Inc., manufactu...

Comparing Operating Results with Average Performance in the Industry

Decor, 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 Decor, Inc., but are average percentages for the industry.)

 

Decor, Inc.

Industry Average

Sales (net)

$12,000,000

100%

Cost of goods sold

7,320,000

69

Gross profit on sales

$ 4,680,000

31 %

Operating expenses:

 

 

Selling

$ 1,800,000

10%

General and administrative

720,000

13

Total operating expenses

$ 2,520,000

23 %

Operating income

$ 2,160,000

8%

Income tax expense

120,000

2

Net income

$ 2,040,000

6 %

Return on assets

19 %

12 %

Instructions

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


b. Comment specifically on differences between Decor, 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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