Following are income statements for Hossa Corporation for 20X1 and 20X2. Percentage of sales amounts are also shown for each operating expense item. Hossa’s income tax rate was 22% in 20X1 and 24% in 20X2.

Hossa’s management was pleased that 20X2 net income was up 6.5% from the prior year.

Although you are also happy with the increase in net income, you are not so sure the news is all positive. You have modeled Hossa’s income as follows:

NET INCOME = SALES ×  ( 1 − COGS %  − OPEX% )  ×  ( 1 − TAX RATE )

Using this model, net income in 20X1 is computed as $5,500 × (1 − 45% − 15%) × (1 − 22%) = $1,716.0. Net income in 20X2 is computed as $6,500 × (1 − 47% − 16%) × (1 − 24%) = $1,827.8.

Required:

1. Prepare a cause-of-change analysis to show the extent to which each of the following items contributed to the $111.8 million increase in Hossa’s net income from 20X1 to 20X2:

• Increase in sales (SALES)

• Increase in cost of sales as a percent of sales (COGS%)

• Increase in other operating expenses as a percent of sales (OPEX%)

• Increase in income tax rate (TAX RATE)

2. Interpret the results for Hossa’s management.

Transcribed Image Text:

20X1 20X2 ($ in millions) $ in millions % of sales $ in millions % of sales $5,500.0 (2,475.0) (825.0) $6,500.0 (3,055.0) (1,040.0) Sales Cost of sales 45% 47% Other operating expenses 15% 16% Operating income Provision for income taxes 2,200.0 (484.0) 2,405.0 (577.2) Net income $1,716.0 $1,827.8 Income tax rate 22% 24%