B-05.11 Problem

# B-05.11 Problem - experience the biggest decline in profit...

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B-05.11 Morton Corporation and Skyline Corporation each sell playground equipment. Morton Corporation's strategy is to focus on selling quality units at the best possible prices, while attempting to minimize selling, general, and administrative expenses (SG&A). Skyline Corporation has concluded that many customers will differentiate more on brand than quality, and is promoting its inferior goods with a significant marketing campaign. Study each company's income statement below, and calculate the respective proportion of sales returns, the gross profit margin, and the net profit on sales. Both companies are subject to a 25% tax rate. Assuming no change in SG&A, which company would experience the biggest increase in profit from a 10% increase in net sales? Which company would
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Unformatted text preview: experience the biggest decline in profit from a 10% decrease in net sales? MORTON CORPORATION Income Statement For the Year Ending December 31, 20X6 Net sales Gross sales 945,876 \$ Less: Sales returns 18,918 926,958 \$ Cost of goods sold 709,407 Gross profit 217,551 \$ Selling expenses 45,000 \$ General & administrative expenses 120,000 165,000 Income before taxes 52,551 \$ Income tax expense (25%) 13,138 Net income 39,413 \$ SKYLINE CORPORATION Income Statement For the Year Ending December 31, 20X6 Net sales Gross sales 985,876 \$ Less: Sales returns 58,918 926,958 \$ Cost of goods sold 417,131 Gross profit 509,827 \$ Selling expenses 337,276 \$ General & administrative expenses 120,000 457,276 Income before taxes 52,551 \$ Income tax expense (25%) 13,138 Net income 39,413 \$...
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