According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.

Required:

1. Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages (rounded to one decimal place). How did the change in computer prices compare to the changes in Computer Tycoon’s sales revenues?

2. Conduct a vertical analysis by expressing each line as a percentage of total revenues (round to one decimal place). Excluding income tax, interest, and operating expenses, did Computer Tycoon earn more profit per dollar of sales in 2016 compared to 2015?

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2016 2015 $100,000 60,000 $120,000 71,500 Sales Revenue Cost of Goods Sold Gross Profit 40,000 48,500 Selling, General, and Administrative Expenses Interest Expense Income before Income Tax Expense Income Tax Expense 36,000 37,000 500 475 3,500 11,025 1,000 5,000 Net Income $ 2,500 $ 6,025