Question

An enterprise is in the process of comparing its current financial performance for Year 3 with the prior 2 years. The enterprise experienced exceptionally strong growth between Years 1 and 2, with a slight decrease in sales between Years 2 and 3.

	Year 1	Year 2	Year 3
Net sales	$4,560,000	$30,980,400	$26,583,220
Cost of goods sold	2,378,900	24,655,340	21,444,985
Selling expenses	490,000	1,289,466	2,099,800
General and administrative expenses	290,500	500,000	600,000

Which one of the following statements is correct when using common-size analysis to compare the results?

• A.The enterprise experienced the highest proportion of selling expenses in Year 2, which led to the high net sales.

• B.The enterprise increased the percentage of general and administrative expenses each year in order to manage the company’s growth.

• C.The enterprise’s proportion of gross profit was lowest in Year 3 due to high production costs.

• D.The enterprise’s profitability increased each year due to more efficient production processes.

Answer 1

	Year 1		Year 2		Year 3
	Amount	%	Amount	%	Amount	%
Net sales	4560000	100.00%	30980400	100.00%	26583220	100.00%
Cost of goods sold	2378900	52.17%	24655340	79.58%	21444985	80.67%
Gross profit	2181100	47.83%	6325060	20.42%	5138235	19.33%
Selling expenses	490000	10.75%	1289466	4.16%	2099800	7.90%
General and administrative expenses	290500	6.37%	500000	1.61%	600000	2.26%
Net income	1400600	30.71%	4535594	14.64%	2438435	9.17%

The enterprise’s proportion of gross profit was lowest in Year 3 at 19.33%

The enterprise’s proportion of gross profit was lowest in Year 3 due to high production costs.

Option C is correct