Interpreting common-size income statements. The Coca-Cola Company (Coke) and PepsiCo dominate the non-alcoholic beverage segment in the United States. Most beverage manufacturing involves adding water to a previously prepared syrup. This mixing process usually occurs at the stage just prior to bottling the beverage. Coke relics on independent companies to conduct the mixing, bottling, and distribution operations, with Coke selling the syrup to the bottlers. PepsiCo relies more heavih on owning its bottlers and thereby remains involved in both manufacturing and distribution. Exhibit 3.24 present common-size income statements for Coke and PepsiCo for three recent years.

a. Suggest possible reasons why the cost of goods sold to sales percentages foi Coke are significantly lower than those of PepsiCo.

b. Suggest reasons why the selling and administrative expense to sales percentages steadily increased for Coke but steadily decreased for PepsiCo.

c. Suggest possible reasons for the decreasing interest expense to sales percentages for both firms.

d. Coke's income tax expense to sales percentages are larger than those for PepsiCo, suggesting that Coke has a higher income tax burden. For a different perspective, compute the ratio of income tax expense to net income before income taxes for each firm. For example, this percentage for Coke for Year 10 is 35.8 percent [= 10.0%/(17.9% +

10.0%)]. What insight does this measure provide regarding the income tax burden of Coke versus PepsiCo?

e. Compare the net income to sales percentages for Coke and PepsiCo with those of the five firms in Exhibit 3.8. Suggest reasons for the levels^ of the profit margins of Coke and PepsiCo relative to these other five firms.