Chapter 2: Q7BP-c (page 79)

The Haines Corp. shows the following financial data for 20X1 and 20X2:
20X1
20X2
Sales
$3,230,000
$3,370,000
Cost of goods sold
2,130,000
2,850,000
Gross profits
$1,100,000
$520,000
Selling and administrative expenses
298,000
227,000
Operating profits
$802,000
$293,000
Interest expense
47,200
51,600
Income before taxes
$754,800
$241,400
Taxes (35%)
264,180
84,490
Income after tax
$490,620
$156,910
For each year, compute the following and indicate whether it is increasing or
decreasing profitability in 20X2 as indicated by the ratio:
c. Interest expenses to sales

Short Answer

Expert verified

Interest expenses to sales for 20X1 and 20X2 are 1.46% and 1.53%, respectively. It is increased by 0.07%.

Step by step solution

Interest expenses to sales for the year 20X1

$\begin{array}{rcl} Interest expenses to sales (20 X 1) & = & \frac{Interest Expense}{Sales} \\ = & \frac{$ 47, 200}{$ 3, 230, 000} \\ = & 1.46 % \end{array}$

Interest expenses to sales for the year 20X2

$\begin{array}{rcl} Interest expenses to sales (20 X 2) & = & \frac{Interest Expense}{Sales} \\ = & \frac{$ 51, 600}{$ 3, 370, 000} \\ = & 1.53 % \end{array}$

Change in Interest expenses to sales ratio

$\begin{array}{rcl} Change in ratio & = & Interest expenses to sales (20 \times 2) - Interest expenses to sales (20 \times 1) \\ = & 1.53 % - 1.46 % \\ = & 0.07 % \end{array}$

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Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500

Short Answer

Step by step solution

Interest expenses to sales for the year 20X1

Interest expenses to sales for the year 20X2

Change in Interest expenses to sales ratio

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	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910