Illustration : Alaska, Inc., manufactures bathroom equipment. Shown below for the current year are the income statements for the company and a common size summary for the industry in which the company operates. (Notice that the percentages in the right-hand column are not for Alaska, Inc., but are average percentages for the industry.)

Alaska, Inc Industry Avg

sales (net)............................................................................................. $12,000,000 100%

cost of goods sold........................................................................... 7,320,000 70

gross profit on sales....................................................................... $4,680,000 30%

operating expenses:

selling.................................................................................................... $1,800,000 10%

general and administrative........................................................ 720,000 14

total operating expenses........................................................... $2,520,000 24%

operating income............................................................................ $2,160,000 6%

income tax expense....................................................................... 120,000 2

net income............................................................................................ $2,040,000 4%

return on assets............................................................................... 20% 12%

Instructions:

a) Prepare a two -column common size income statement for Alaska, Inc. The first column should show for Alaska, Inc., all items expressed as a percentage of net sales. The second column should show the equivalent industry average for the data given in the problem. The purpose of this common size statement is to compare the operating results of Alaska, Inc., with the averagefor the industry.

b) Comment specifically on differences between Alaska, Inc., and the industry average with respect to gross profit on sales, selling expenses, general and administrative expenses, operating income, net income, and return on assets. Suggest possible reasons for the more important disparities.