Empire Labs Inc was organized several years ago to produce and market several new miracle drugs The following data on the company are 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 QUESTION QUE 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

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 07, 2024

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

Empire Labs Inc. was organized several years ago to produce and market several new miracle drugs. The following data on the company are 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.

QUESTION

QUE- 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.