Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2016. Sales during the first full year (2017) of operation reached $1.3 million. Sales increased by 15 percent in 2018 and another 20 percent in 2019. However, after increasing in 2018 over 2017, profits fell sharply in 2019, causing Kaj to wonder what was happening to his pride-and joy business venture. After all, Kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation.

Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and uncluttered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing, structurally strong modern furniture. Danish furnishings and the home furnishings produced by other Scandinavian countriesSweden, Norway, and Finlandare made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics.

Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden. As is typical in Europe, Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After learning the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2016. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2016. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing.

Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scan-dinavian home furnishings in the Northeast in 2017 and 2018, he decided to enter the West Coast market. An increase in expenses occurred associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints.

2019 SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2017 2018 Net sales $1,300,000 $1,500,000 Cost of goods sold 780,000 900,000 Gross profit 520,000 600,000 Marketing 130,000 150,000 General and administrative 150,000 150,000 Depreciation 40,000 53,000 EBIT 200,000 247,000 Interest 45,000 57,000 Earnings before taxes 155,000 190,000 Income taxes (40%) 62,000 76,000 Net income $ 93,000 $ 114,000 Cash Dividends $ 0 $ 74,000 $1,800,000 1,260,000 540,000 200,000 200,000 60,000 80,000 70,000 10, 4,000 $ 6,000 $ 0 . SCANDI HOME FURNISHINGS, INC. 2019 BALANCE SHEETS Cash Accounts receivable Inventories Total current assets Fixed assets, net 2017 $ 50,000 200,000 450,000 700,000 300,000 2018 $ 40,000 260,000 500,000 800,000 400,000 $ 10,000 360,000 600,000 970,000 500,000 (continued on next page) 3. Calculate average profit margin ratio for the years listed. Next, describe what is happening to the profitability of Scandi Home Furnishings