According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 20.9 percent between 2007 and 2008. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2008.

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 2008 compared to 2007?

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2008 2007 Sales Revenues $98,913 $121,761 Cost of Goods Sold 59,249 71,583 Gross Profit 39,664 50,178 Selling, General, and Administrative Expenses 36,943 36,934 Interest Expense 565 474 Income before Income Tax Expense 2,156 12,770 Income Tax Expense 1,024 5,540 Net Income $ 1,132 $ 7,230