Answer to Question #246081 in Management for nunu gulilat

Question

As indicated in table above sales increased by 8.3% while net income decreased by 21.9%. You identified that there were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income. You already identified the Couse of the problem. Therefore, what are the possible actions should be taken to eliminate the reduction of the net income?

Answer 1

The company’s major problem seems to be the increase in cost of goods sold, which increased from 58.6% of sales last year to 62.3% of sales this year. This suggests that the company is not passing the increases in costs of its products on to its customers. As a result, cost of goods sold as a percentage of sales has increased and gross margin has decreased. This change has been offset somewhat by reduction in administrative expenses as a percentage of sales. Note that administrative expenses decreased from 10.3% to only 8.9% of sales over the two years. However, this decrease was not enough to completely offset the increased cost of goods sold, so the company’s net income decreased as a percentage of sales this year.