The Book Wermz reported sales for 2005 of $6,230,000. Cost of goods sold was 55% of sales, and operating expenses were $2,155,000. Interest expense was $190,000. Income taxes were 35% of pretax income. Total assets at the end of 2005 were $5,623,000.

Required

Use the information provided to produce an income statement for The Book Wermz for the year ended December 31, 2005. Enter appropriate captions for the statement at the top of the spreadsheet and appropriate captions in column A. Enter amounts in column B. Use equations to calculate subtotals and totals. Calculate cost of goods sold as sales × 0.55 and income taxes as pretax income × 0.35.

Following the income statement, enter the total assets data and calculate asset turnover, profit margin, and return on assets. Enter captions in column A and calculations in column B. Use cell references to the income statement and total assets in these calculations.

Suppose that the company’s management believes that it can increase sales by reducing product prices. Cutting the prices relative to the costs of the goods sold would increase the ratio to 60%, but is expected to increase total sales to $7 million. Operating expenses and interest expense are relatively fixed and would not be affected by these changes. Total assets also would not be affected. In column C calculate the effects of the changes on the company’s income statement and financial ratios. Copy the data from column B to column C and make changes as needed. Would the pricing change be advantageous to the company?

Another alternative for the company is to raise prices relative to cost of goods sold and significantly increase advertising. The increase in prices would reduce cost of goods sold to 50% of sales. The additional advertising expenses would increase operating expenses to $3 million.

Total sales are expected to increase to $7.5 million. Interest expense and total assets would not be affected by these changes. In column D calculate the effects of the changes on income and the financial ratios. Would the company benefit from these changes?