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 experience the biggest decline in profit from a 10% decrease in net sales?

Transcribed Image Text:

Net sales MORTON CORPORATION Income Statement For the Year Ending December 31, 20X6 Gross sales Less: Sales returns Cost of goods sold Gross profit Selling expenses General and administrative expenses Income before taxes Income tax expense (25%) Net income $945,876 18,918 $926,958 709,407 $217,551 $ 45,000 120,000 165,000 $ 52,551 13,138 $ 39,413