Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.
During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data.
| Computron’s Income Statement | ||
| 2015 | 2016 | |
| INCOME STATEMENT | ||
| Net sales | $3,432,000 | $5,834,400 |
| Cost of Goods Sold Except Depr. | $2,864,000 | $4,980,000 |
| Depreciation and amortization | $18,900 | $116,960 |
| Other Operating Expenses | $340,000 | $720,000 |
| Total Operating Costs | $3,222,900 | $5,816,960 |
| Earnings before interest and taxes (EBIT) | $209,100 | $17,440 |
| Less interest | $62,500 | $176,000 |
| Pre-tax earnings | $146,600 | -$158,560 |
| Taxes (40%) | $58,640 | -$63,424 |
| Net Income | $87,960 | -$95,136 |
| Dividends | $22,000 | $11,000 |
| Tax rate | 40% | 40% |