Vertical analysis of income statement

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $50,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:

Line Item Description 20Y2 20Y1Sales$1,500,000 $1,250,000 Cost of goods sold(510,000)(475,000)Gross profit$990,000 $775,000 Selling expenses$(270,000)$(200,000)Administrative expenses(180,000)(156,250)Total operating expenses$(450,000)$(356,250)Operating income$540,000 $418,750 Other revenue60,000 50,000 Income before income tax expense$600,000 $468,750 Income tax expense(450,000)(375,000)Net income$150,000 $93,750

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1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. Round percentages to one decimal place. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Line Item Description20Y2 Amount20Y2 Percent20Y1 Amount20Y1 PercentSales$SalesSales%$SalesSales%Cost of goods soldCost of goods soldCost of goods sold%Cost of goods soldCost of goods sold%Gross profit$Gross profitGross profit%$Gross profitGross profit%Selling expenses$Selling expensesSelling expenses%$Selling expensesSelling expenses%Administrative expensesAdministrative expensesAdministrative expenses%Administrative expensesAdministrative expenses%Total operating expenses$Total operating expensesTotal operating expenses%$Total operating expensesTotal operating expenses%Operating income$Operating incomeOperating income%$Operating incomeOperating income%Other revenueOther revenueOther revenue%Other revenueOther revenue%Income before income tax expense$Income before income tax expenseIncome before income tax expense%$Income before income tax expenseIncome before income tax expense%Income tax expenseIncome tax expenseIncome tax expense%$Income tax expenseIncome tax expense%Net income$Net incomeNet income%$Net incomeNet income%

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2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).

The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) fill in the blank 1 of 4

improvedworsened

as a percentage of sales. As a result, net income as a percentage of sales fill in the blank 2 of 4

increaseddecreased

. The sales promotion campaign appears to have been fill in the blank 3 of 4

successfula failure

. While selling expenses as a percent of sales increased slightly, the increased cost was more than made up for by increased fill in the blank 4 of 4

salesincome

.