Part B

Directions: Click the case link above and use the information provided in Dealer's Choice, Part B, to answer this question: Dealer's Choice's management expects 2014 pretax and net profit margins to equal or exceed 2041 levels. How realistic is that expectation? O Dealer's Choice's narrow gross profit margin makes sustaining its operating, pretax, and net profit margins very challenging. Given the substantial improvement in its gross profit margin, the company should be able to meet its expectations. O Dealer's Choice's operating expenses are growing much faster than sales. The company will need to control those costs better in order to meet its expectations. O with interest and depreciation expenses growing, it will be difficult for the company to maintain its most recent pretax and net profit margins. Dealer's Choice Balance Sheets (in $000s) As At December 31: 20Y3 20Y2 20Y1 306 924 231 576 204 524 ASSETS Current assets Cash Accounts receivable Inventory Raw materials Work in process Finished goods Total inventory Total current assets 281 232 76 589 1,819 341 239 86 666 1,473 170 105 86 361 1,089 Fixed assets Gross fixed assets Less: Accumulated depreciation Net fixed assets 679 97 582 703 79 624 681 69 612 Other noncurrent assets 20 0 14 TOTAL ASSETS $ 2,421 2,097 1,715 LIABILITIES AND EQUITY Current liabilities Line of credit Current portionLTD Accounts payable Accrued expenses Other current liabilities Total current liabilities 270 19 1,033 268 255 19 814 187 5 1,280 225 19 531 135 12 922 11 1,601 Long-term debt 142 149 155 Other noncurrent liabilities 3 3 3 Owners' equity 675 665 635 TOTAL LIABILITIES AND EQUITY $ 2,421 $ 2,097 1,715 Dealer's Choice Income Statements (in $000s) Years Ended December 31: 20Y3 20Y2 2011 $ $ $ Sales Cost of goods sold Gross profit 7,990 6,308 1,682 7,486 6,357 1,129 6,495 5,453 1,042 Selling, general, and administrative expense Depreciation expense Total SG&A expenses 1,377 26 1,403 859 24 883 758 18 776 80 50 Interest expense Loss on sale of fixed assets Other expenses Income before taxes 7 22 170 75 0 4 167 0 216 Taxes 82 81 102 Net income $ 88 $ 86 $ 114 Dividends 78 56 100 Retained earnings $ 10 $ 30 $ 14 Directions: Click the case link above and use the information provided in Dealer's Choice, Part B, to answer this question: Dealer's Choice's management expects 2014 pretax and net profit margins to equal or exceed 2041 levels. How realistic is that expectation? O Dealer's Choice's narrow gross profit margin makes sustaining its operating, pretax, and net profit margins very challenging. Given the substantial improvement in its gross profit margin, the company should be able to meet its expectations. O Dealer's Choice's operating expenses are growing much faster than sales. The company will need to control those costs better in order to meet its expectations. O with interest and depreciation expenses growing, it will be difficult for the company to maintain its most recent pretax and net profit margins. Dealer's Choice Balance Sheets (in $000s) As At December 31: 20Y3 20Y2 20Y1 306 924 231 576 204 524 ASSETS Current assets Cash Accounts receivable Inventory Raw materials Work in process Finished goods Total inventory Total current assets 281 232 76 589 1,819 341 239 86 666 1,473 170 105 86 361 1,089 Fixed assets Gross fixed assets Less: Accumulated depreciation Net fixed assets 679 97 582 703 79 624 681 69 612 Other noncurrent assets 20 0 14 TOTAL ASSETS $ 2,421 2,097 1,715 LIABILITIES AND EQUITY Current liabilities Line of credit Current portionLTD Accounts payable Accrued expenses Other current liabilities Total current liabilities 270 19 1,033 268 255 19 814 187 5 1,280 225 19 531 135 12 922 11 1,601 Long-term debt 142 149 155 Other noncurrent liabilities 3 3 3 Owners' equity 675 665 635 TOTAL LIABILITIES AND EQUITY $ 2,421 $ 2,097 1,715 Dealer's Choice Income Statements (in $000s) Years Ended December 31: 20Y3 20Y2 2011 $ $ $ Sales Cost of goods sold Gross profit 7,990 6,308 1,682 7,486 6,357 1,129 6,495 5,453 1,042 Selling, general, and administrative expense Depreciation expense Total SG&A expenses 1,377 26 1,403 859 24 883 758 18 776 80 50 Interest expense Loss on sale of fixed assets Other expenses Income before taxes 7 22 170 75 0 4 167 0 216 Taxes 82 81 102 Net income $ 88 $ 86 $ 114 Dividends 78 56 100 Retained earnings $ 10 $ 30 $ 14