Question

Profitability Analysis

Kolby Enterprises reports the following information on its income statement:

Net sales$220,000Administrative expenses$10,000

Cost of goods sold140,000Other income15,000

Selling expenses40,000Other expense5,000

Required

Calculate Kolby’s gross profit percentage and return on sales ratio. Kolby is planning to add a new product and expects net sales to be $30,000 and cost of goods to be $25,000. No other income or expenses are expected to change. How will this affect Kolby’s gross profit percentage and return on sales ratio?

(Round all answers to 1 decimal place.)

Answer 1

1) gross profit ratio:

Gross profit = sales - COGS

GP = 220000-140000 = 80000

GP ratio = GP/sales = 80000/220000 = 36.36%

2)return on sales ration:

Net income = sales + other income - administration expenses - COGS - selling expenses - other expenses

= 220000 + 15000 - 10000 - 140000 - 40000 - 5000

= 40000

Ratio = net income/sales = 40000/220000 = 18.18%

If new product is produced

Then new sales = 220000 + 30000 = 250000

New COGS = 140000 + 25000 = 165000

OTHER THINGS REMAINS SAME

1) NEW GP RATIO:

GP = 250000-165000 = 85000

Sales = 250000

Gp ratio = 85000/250000 = 34%

2) New return on sales ratio;

New net income = 250000 + 15000 - 10000 - 165000 - 40000 - 5000

= 45000

Ratio = 45000/250000 = 18%

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