Saunders Corporation manufactures consumer electronics products. Selected income statement data for 2009 and 2010 are provided in Table 5.

P.S. The company is not operating at full capacity and therefore fixed costs are not changing:

Table 5

Selected Income Statement Items for Saunders Co. in million USD

Saunders Corporation (amounts in millions of dollars)	2009	2010
Sales	8,296	8,871
Cost of Goods Sold	(5,890)	(6,290)
Selling and Administrative Expenses	(1,788)	(1,714)
Operating Income before Income Taxes	618	867

1. Calculate the variable-cost percentage of the cost of goods sold by dividing the change in cost of goods sold to change in sales between 2009 and 2010 and use it to determine the fixed and variable components of the cost of goods sold.

2. Repeat the process in part (a) above to calculate the fixed and variable components of the selling and administrative expenses.

3. Saunders Corporation discloses that it expects sales to grow at the following percentages in future years: Year 2011, 12%; Year 2012, 10%; Year 2013, 8%; Year 2014, 6%.

4. Determine forecasts of sales, cost of goods sold, selling and administrative expenses, and operating income before income taxes for Saunders for Year 2011 to Year 2014 using the cost structure amounts derived in parts (a) and (b) above.

5. Compute the ratio of operating income before income taxes to sales for Year 2011 through Year 2014.

6. Interpret the changes in the ratio computed in part (d) in light of the expected changes in sales.