Question

Lemon Auto Wholesalers had sales of $1,180,000 last year, and cost of goods sold represented 73 percent of sales. Selling and administrative expenses were 13 percent of sales. Depreciation expense was $12,000 and interest expense for the year was $13,000. The firm’s tax rate is 30 percent.

a. Compute earnings after taxes.

b-1. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 15 percent of sales, sales can be increased to $1,230,100. The extra sales effort will also reduce cost of goods sold to 69 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at $12,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $20,900. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. (Round taxes and earnings after taxes to 1 decimal place.)

b-2. Will her ideas increase or decrease profitability?

• Increase profitability

• Decrease profitability

Answer 1

Hence increase profitability by $16601.20