Carr Auto Wholesalers had sales of $900,00 in 2008 and their costs of goods sold
ID: 2665374 • Letter: C
Question
Carr Auto Wholesalers had sales of $900,00 in 2008 and their costs of goods sold represented 65 percent of sales. Selling and administrative expenses were 9 percent of sales. Depreciation expense was $10,000 and interest expenses for the year was $8,000. The firm's tax rate is 30 percent.a. Compute the earnings after taxes.
b. Assume the firm hires Ms. Hood, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 12 percent of sales, sales can be increased to $1,000,000. The extra sales effort will also reduce cost of goods sold to 60 percent of sales (there will be a larger markup in prices as a result of more aggressive selling). Depreciation expense will remain at $10,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $15,000. The firm's tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Hood's suggestions for Carr Auto Wholesalers. Will her ideas increase or decrease profitability?
Explanation / Answer
part a)
Sales 900,000
less: CGS (585,000) (Cost of Goods Sold=65% (900,000)=585000)
less:administrative expenses (81,000) (administrative expenses=9%(900,000)=81000)
less:depriciation expense (10,000)
Earning before interest and tax 224,000
less:interest expense (8,000)
earning before tax 216,000
less:taxes (64,800) (taxes=30%(216,000)=64,800)
earnings after taxes 151,200
part b)
Sales $1,000,000
less: CGS (600,000) (Cost of Goods Sold=60% (1,000,000)=600,000)
less:administrative expenses (120,000) (administrative expenses=12%(1,000,000)=120,000)
less:depriciation expense (10,000)
Earning before interest and tax 270,000
less:interest expense (15,000)
earning before tax 255,000
less:taxes (76,500) (taxes=30%(255,000)=76,500)
earnings after taxes 178,500
due to more aggressive selling earnings have increased which results in increase in profitability.