Ralph Brito opened Brito Auto Sales several years ago. Since then, the company has grown and sales have steadily increased. In the last year, however, income has declined despite successful efforts to increase sales. In addition, the company is forced to borrow more and more money from the bank to finance the operation.

The following information is available:

Required: Assume that you are hired by Mr. Brito as a consultant. Review the Brito income statement and write a report to Mr. Brito that addresses his concerns.

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Brito Auto Sales Income Statement For the Year Ending December 31, 2005 Sales Cost of Goods Sold Beginning Inventory + Cost of Goods Purchased = Goods Available for Sale - Ending Inventory = Cost of Goods Sold Operating Expense: Gross Profit Selling Expense Administrative Expense Operating Income $ 66,000 639,000 $705,000 $758,000 (85,000) 620,000 $138,000 $ 55,000 60,000 (115,000) $ 23,000 Sales Cost of Goods Sold Beginning Inventory Brito Auto Sales Income Statement For the Year Ending December 31, 2006 + Cost of Goods Purchased = Goods Available for Sale - Ending Inventory = Cost of Goods Sold Gross Profit Operating Expense: Selling Expense Administrative Expense Operating Income $ 85,000 799,000 $884,000 (123,000) $ 66,000 60,000 $890,000 761,000 $129,000 (126,000) $ 3,000