Morton Corporation and Skyline Corporation each sell playgro

Morton Corporation and Skyline Corporation each sell playground equipment. Morton Corporation\'s strategy is to focus on selling quality units at the best possible prices, while attempting to minimize selling, general, and administrative expenses (SG&A;). Skyline Corporation has concluded that many customers will differentiate more on brand than quality, and is promoting its inferior goods with a significant marketing campaign Study each company\'s income statement below, and calculate the respective proportion of sales returns, the gross profit margin, and the net profit on sales. Both companies are subject to a 25% tax rate. Assuming no change in SG&A;, which company would experience the biggest increase in profit from a 10% increase in net sales? Which company would experience the biggest decline in profit from a 10% decrease in net sales?

Solution

Morton Corporation sales Returns Rate: 2.00% =18918/945876 Gross Profit Margin: 23.47% =217551/926958 Net Profit Margin 4.25% =39413/926958 Skyline Corporation sales Returns Rate: 5.98% =58918/985876 Gross Profit Margin: 55.00% =509827/926958 Net Profit Margin 4.25% =39413/926958 Morton Skyline 10% increase in net sales Net Sales      1,019,654 =926958*110%        1,019,654 =926958*110% Cost of Goods sold         780,341 =1019654*(1-23.47%)           458,844 =1019654*(1-55%) Gross profit(net sales*gross profit margin)         239,313 =1019654*23.47%           560,810 =1019654*55% SG&A         165,000 =45000+120000           457,276 =337276+120000 Income before taxes            74,313 =239313-165000           103,534 =560810-457276 Income tax expenses(Income before taxes *25%)            18,578 = 74313*25%              25,883 = 7103534*25% Net income            55,735 =74313-18578              77,650 =103534-25883 Skyline will experience biggest increase. 10% decrease in net sales Net Sales         834,262           834,262 Cost of Goods sold         638,461           375,418 Gross profit(net sales*gross profit margin)         195,801           458,844 SG&A         165,000           457,276 Income before taxes            30,801                1,568 Income tax expenses(Income before taxes *25%)              7,700                    392 Net income            23,101                1,176 Skyline will experience biggest decrease.