Empire Labs Inc. was organized several years ago to produce and market several new miracle drugs. The following data on the company is available for the past two years:

EMPIRE LABS INC. Comparative Income Statement For the Years Ended December 31
	This Year	Last Year
Sales	$20,000,000	$15,000,000
Less: Cost of goods sold	13,000,000	9,000,000
Gross margin	7,000,000	6,000,000
Less: Operating expenses	5,260,000	4,560,000
Net operating income	1,740,000	1,440,000
Less: Interest expense	240,000	240,000
Net income before taxes	1,500,000	1,200,000
Less: Income taxes (30%)	450,000	360,000
Net income	$ 1,050,000	$ 840,000

EMPIRE LABS INC. Comparative Retained Earnings Statement For the Years Ended December 31
	This Year	Last Year
Retained earnings, January 1	$2,400,000	$1,960,000
Add: Net income (above)	1,050,000	840,000
Total	3,450,000	2,800,000
Deduct: Cash dividends paid:
Preferred dividends	120,000	120,000
Common dividends	360,000	280,000
Total dividends paid	480,000	400,000
Retained earnings, December 31	$2,970,000	$2,400,000

EMPIRE LABS INC. Comparative Balance Sheet December 31
	This Year	Last Year
Assets
Current assets:
Cash	$ 200,000	$ 400,000
Accounts receivable, net	1,500,000	800,000
Inventory	3,000,000	1,200,000
Prepaid expenses	100,000	100,000
Total current assets	4,800,000	2,500,000
Plant and equipment, net	5,170,000	5,400,000
Total assets	$9,970,000	$7,900,000
Liabilities and Shareholders Equity
Liabilities:
Current liabilities	$2,500,000	$1,000,000
Bonds payable, 12%	2,000,000	2,000,000
Total liabilities	4,500,000	3,000,000
Shareholders equity:
Preferred shares, 8%, $10 par	1,500,000	1,500,000
Common shares, no par (200,000 @ $5)	1,000,000	1,000,000
Retained earnings	2,970,000	2,400,000
Total shareholders equity	5,470,000	4,900,000
Total liabilities and shareholders equity	$9,970,000	$7,900,000

The president of Empire Labs Inc. is deeply concerned. Sales increased by $5 million from last year to this year, yet the companys net income increased by only a small amount. Also, the companys operating expenses went up this year, even though a major effort was launched during the year to cut costs.

Required:

1. For both last year and this year, prepare the income statement and the balance sheet in common-size format. Round computations to one decimal place.
2. From your work in part (1), explain to the president why the increase in profits was so small this year. Were any benefits realized from the companys cost-cutting efforts? Explain.