Lemon Auto Wholesalers had sales of $1,630,000 last year, and cost of goods sold represented 70 percent of sales. Selling and administrative expenses were 13 percent of sales. Depreciation expense was $14,000 and interest expense for the year was $12,000. The firms tax rate is 30 percent. a. Compute earnings after taxes.

b-1. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 15 percent of sales, sales can be increased to $1,680,100. The extra sales effort will also reduce cost of goods sold to 66 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at $14,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $19,500. The firms tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carrs suggestions for Lemon Auto Wholesalers. (Round taxes and earnings after taxes to 1 decimal place.)

b-2. Will her ideas increase or decrease profitability?

	Increase profitability
	Decrease profitability