Financial Reporting, Financial Statement Analysis, and Valuation. 8th Edition

10.12

Sony Corporation manufactures and markets consumer electronics products. Assume the following are selected income statement data for 20X1 and 20X2 (amounts in billions of yen):

	20X1	20X2
Sales	8,296 yen	8,871 yen
COGS	(5,890)	(6,290)
Selling and Admin Expenses	(1,788)	(1,714)
Operating Income Before Taxes	618 yen	867 yen

A) Estimate the variable cost as a percentage of sales for the cost of goods sold by dividing the amount of the change in the cost of goods sold by the amount of the change in sales. Then multiply the variable-cost percentage times sales to etimate the total variable cost. Subtract the variable cost from the total cost to estimate the fixed cost for cost of goods sold. Follow this procedure to determine the cost structure (fixed cost plus variable cost as a percentage of sales) for cost of goods sold for Sony.

B) Repeat Requirement A for selling and administrative expenses.

C) Suppose that Sony Corporation dsicloses that it expects sales to grow at the following rates in future years. Year +1, 12%, Year +2, 10%, Year +3, 8%, Year +4, 6%. Project sales, cost of goods sold, selling and administrative expenses, and operating income before taxes for Sony for Year +1 to Year +4 using the cost structure amounts derived in Requirements A and B.

D) Compute the ratio of operating income before income taxes to sales for Year +1 through Year +4.

E) Interpret the changes in the ratio computed in requirement D in light of the expected changes in sales.