Financial Performance Measures
Financial Performance Measures
Tarbox Manufacturing Company makes sheet metal products for heating and air conditioning installations. Its statements of cost of goods manufactured and income statements for the last two years are presented below and on the next page.
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Tarbox Manufacturing Company Statements of Cost of Goods |
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This Year |
This Year |
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Direct materials used |
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Materials inventory, |
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beginning |
$ 91,240 |
$93,560 |
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Direct materials purchased |
987,640 |
959,940 |
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(net) |
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Cost of direct materials |
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available for use |
$1,078,880 |
$1,053,500 |
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Less materials inventory, |
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ending |
95,020 |
91,240 |
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Cost of direct |
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materials used |
$ 983,860 |
$ 962,260 |
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Direct labor |
571,410 |
579,720 |
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Overhead |
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Indirect labor |
$ 182,660 |
$171,980 |
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Power |
34,990 |
32,550 |
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Insurance |
22,430 |
18,530 |
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Supervision |
125,330 |
120,050 |
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Depreciation |
75,730 |
72,720 |
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Other overhead costs |
41,740 |
36,280 |
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Total overhead |
482,880 |
452,110 |
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Total manufacturing costs |
$2,038,150 |
$1,994,090 |
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Add work in process |
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inventory, beginning |
148,875 |
152,275 |
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Total cost of work in |
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process during the period |
$2,187,025 |
$2,146,365 |
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Less work in process |
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inventory, ending |
146,750 |
148,875 |
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Cost of goods |
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manufactured |
$2,040,275 |
$1,997,490 |
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Tarbox Manufacturing Company |
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This Year |
Last Year |
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Sales |
$2,942,960 |
$3,096,220 |
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Cost of goods sold |
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Finished goods |
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inventory, beginning |
$ 142,640 |
$ 184,820 |
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Cost of goods |
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manufactured |
2,040,275 |
1,997,490 |
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Cost of goods |
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|
available for sale |
$2,182,915 |
$2,182,310 |
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Less finished goods |
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inventory, ending |
186,630 |
142,640 |
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Total cost of goods sold |
1,996,285 |
2,039,670 |
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Gross margin |
$ 946,675 |
$1,056,550 |
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Selling and |
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administrative expenses |
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Sales salaries and |
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commission expense |
$ 394,840 |
$ 329,480 |
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Advertising expense |
116,110 |
194,290 |
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Other selling expenses |
82,680 |
72,930 |
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Administrative expenses |
242,600 |
195,530 |
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Total selling and |
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administrative expenses |
836,230 |
792,230 |
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Income from operations |
$ 110,445 |
$ 264,320 |
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Other revenues and |
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expenses |
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Interest expense |
54,160 |
56,815 |
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Income before income |
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taxes |
$ 56,285 |
$ 207,505 |
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Income taxes expense |
19,137 |
87,586 |
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Net income |
$ 37,148 |
$ 119,919 |
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For the past several years, the company’s income has been declining. You have been asked to comment on why the ratios for Tarbox’s profitability have deteriorated.
1. In preparing your comments, compute the following ratios for each year:
a. Ratios of cost of direct materials used to total manufacturing costs, direct labor to total manufacturing costs, and total overhead to total manufacturing costs. (Round to one decimal place.)
b. Ratios of sales salaries and commission expense, advertising expense, other selling expenses, administrative expenses, and total selling and administrative expenses to sales. (Round to one decimal place.)
c. Ratios of gross margin to sales and net income to sales. (Round to one decimal place.)
2. From your evaluation of the ratios computed in 1, state the probable causes of the decline in net income.
3. What other factors or ratios do you believe should be considered in determining the cause of the company’s decreased income?