C 2. 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.

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?

Transcribed Image Text:

Tarbox Manufacturing Company Statements of Cost of Goods Manufactured For the Years Ended December 31 Direct materials used This Year Last Year Materials inventory, beginning $ 91,240 $ 93,560 Direct materials purchased (net) 987,640 959,940 Cost of direct materials available for use $1,078,880 $1,053,500 Less materials inventory, ending 95,020 91,240 Cost of direct materials used $ 983,860 Direct labor 571,410 $ 962,260 579,720 Overhead Indirect labor $ 182,660 Power 34,990 $ 171,980 32,550 Insurance 22,430 18,530 Supervision 125,330 120,050 Depreciation 75,730 72,720 Other overhead costs 41,740 36,280 Total overhead 482,880 452,110 Total manufacturing costs $2,038,150 $1,994,090 Add work in process inventory, beginning 148,875 152,275 Total cost of work in process during the period $2,187,025 $2,146,365 Less work in process inventory, ending 146,750 148,875 Cost of goods manufactured $2,040,275 $1,997,490