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28 Nov 2019

Local Co. has sales of $ 10.5 million and cost of sales of $ 6.4 million. Its​ selling, general and administrative expenses are $ 490,000$ and its research and development is $ 1.1 million. It has annual depreciation charges of $ 1.2 million and a tax rate of 35 %

a. What is​ Local's gross​ margin?

b. What is​ Local's operating​ margin?

c. What is​ Local's net profit​ margin?

d. If Local Co. had an increase in selling expenses of

$320,000​,

how would that affect each of its​ margins?

e. If Local Co.had interest expense of

$830,000​,

how would that affect each of its​ margins?

a. What is​ Local's gross​ margin?

​Local's gross margin is ​%.

​(Round to one decimal​ place.)

b. What is​ Local's operating​ margin?

​Local's operating margin is ​%.

​(Round to one decimal​ place.)

c. What is​ Local's net profit​ margin?

​Local's net profit margin is %.

​(Round to two decimal​ places.)

d. If Local Co. had an increase in selling expenses of $320,000​,

how would that affect each of its​ margins?  ​(Select the best choice​ below.)

A.

Selling expenses do not affect the gross​ margin, but the increase in such expenses will decrease the other margins.

B.

Selling expenses only affect the operating​ margin, but the increase in such expenses will not affect the other margins.

C.

Selling expenses only affect the gross​ margin, but the increase in such expenses will not affect the other margins.

D.

Selling expenses only affect the net profit​ margin, but the increase in such expenses will not affect the other margins.

e. If Local Co.had interest expense of $830,000​,

how would that affect each of its​ margins? ​ (Select the best choice​ below.)

A.

Only the operating margin accounts for interest​ expense, so both the gross and profit margins will be unaffected.

B.

Only the gross margin accounts for interest​ expense, so both the net profit and operating margins will be unaffected.

C.

Both the gross and operating margins will be​ affected, but the net profit margin will be unaffected.

D.

Only the net profit margin accounts for interest​ expense, so both the gross and operating margins will be unaffected.

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Problem 4-23
Ratio Analysis

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2014 (In Thousands)
Cash $153,615 Accounts payable $167,580
Receivables 516,705 Other current liabilities 139,650
Inventories 391,020 Notes payable 83,790
Total current assets $1,061,340 Total current liabilities $391,020
Long-term debt $349,125
Net fixed assets 335,160 Common equity 656,355
Total assets $1,396,500 Total liabilities and equity $1,396,500
Barry Computer Company:
Income Statement for Year Ended December 31, 2014 (In Thousands)
Sales $2,450,000
Cost of goods sold
Materials $1,102,500
Labor 661,500
Heat, light, and power 73,500
Indirect labor 196,000
Depreciation 98,000 $2,131,500
Gross profit $318,500
Selling expenses 171,500
General and administrative expenses 24,500
Earnings before interest and taxes (EBIT) $122,500
Interest expense 38,404
Earnings before taxes (EBT) 84,096
Federal and state income taxes (40%) 33,638
Net income $50,458
aCalculation is based on a 365-day year.

Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
1) FIRM INDUSTRY
Profit margin ?% 1.92%
Total assets turnover ?x 1.98x
Equity multiplier ?


2) Outline Barry's strengths and weaknesses as revealed by your analysis.
Select the true statement

a)The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

b)The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.

c)The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

d)The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

e)The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

3) Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Select true statement

a) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.

b) If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.

c) If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.

d) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.

e) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.

Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below:

Sales (13,500 units at $20 per unit) $ 252,000
Variable expenses 126,000
Contribution margin 126,000
Fixed expenses 141,000
Net operating loss $ (15,000)
Required:
1.

Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)
CM ratio %
Break-even point in units
Break-even point in dollars $
2.

The sales manager feels that an $62,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $87,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)
is $
3.

Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values. Omit the "$" sign in your response.)
Contribution Income Statement
$
$
4.

Refer to the original data. The company%u2019s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,700? (Do not round intermediate calculations.)
Sales units
5.

Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $119,000 per month.
a.

Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Omit the "%" and "$" signs in your response.)
CM ratio %
Break-even point in units
Break-even point in dollars $
b.

Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.)

Not Automated

Automated
Total Per Unit % Total Per Unit %
$ $ $ $
$ $
$ $

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