5. (10 Points) ABC company shared the following portion of its Income Statement

Question

5. (10 Points) ABC company shared the following portion of its Income Statement with you and agreed to meet with you at a later date to discuss these historical results. 2016 24,000,000 2,240,000 2017 30,000,000 15,600,000 2015 20,000,000 Revenue CGS Gross Profit Selling General & Administrative Research & Development Deprec & Amort Total Op. Expense 3,000,000 2,400,000 1,000,000 500,000 6,900,000 3.600,000 2,640,000 1,000,000 500,000 7,740,000 4,500,000 3,000,000 1,000,000 500,000 9,000,000 Without any further information, you create a common size statement f for each year. Quickly analyzing that statement, you note a few trends over the three year period that you want to discuss with management. Note your basic comments and concerns by ch appropriate box below under the "Good", "Concern”, or "Unsure" column. ecking the Conclusion (2 points each) Good Concern Unsure ross Profit elling expenses neral & Administrative costs esearch & Development perating Profit Feel free to make a comment of no more than 10 - 15 words per item to support your conclusion. Comment Gross Profit elling General & Administrative esearch & Development Operating Profit Comments will only add I point per category if your basic conclsion is incorrect Managerial Finance Mid-Term ExamWinter 2018

Explanation / Answer

Gross profit

concern

Because gross profit is increasing in dollars over the years but declining as a percentage of sales

Selling exp

good

Because it is constant as a % of sales over the years

General and administration expenses

concern

Because it must be constant but it is having a increasing trend over the years

Research and development expenses

good

Because it is constant over the years

Operating profit

good

Because operating profit is increasing in dollars as well as, as a percentage of sales over the years

revenue $ 20,000,000.00 $ 24,000,000.00 $ 30,000,000.00 cogs $ 10,000,000.00 $ 12,240,000.00 $ 15,600,000.00 Gross profit $ 10,000,000.00 $ 11,760,000.00 $ 14,400,000.00 total opearying exp $    6,900,000.00 $    7,740,000.00 $    9,000,000.00 operating profit $    3,100,000.00 $    4,020,000.00 $    5,400,000.00 Gross profit % 50.00% 49.00% 48.00% operating profit % 15.50% 16.75% 18.00% selling exp as % of sales 15.00% 15.00% 15.00%

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