Shape It Manufacturing Company makes sheet metal products. For the past several years, the company's income has been declining. Its statements of cost of goods manu- factured and income statements for the last two years are shown here. Review and com- ment on why the ratios for Shape It's profitability have deteriorated.
Direct materials used:
shape It Manufacturing Company statements of Cost of goods Manufactured For the years ended December 31
|
This year
|
Last year
|
|
Materials inventory, beginning
|
$ 91,240
|
$ 93,560
|
|
Direct materials purchased (net)
|
987,640
|
959,940
|
|
Cost of direct materials available for use
|
$1,078,880
|
$1,053,500
|
|
Less materials inventory, ending
|
95,020
|
91,240
|
|
Cost of direct materials used
|
$ 983,860
|
$ 962,260
|
|
Direct labor
|
571,410
|
579,720
|
|
Total overhead
|
482,880
|
452,110
|
|
Total manufacturing costs
|
$2,038,150
|
$1,994,090
|
|
Add work in process inventory, beginning
|
148,875
|
152,275
|
|
Total cost of work in process during the period
|
$2,187,025
|
$2,146,365
|
|
Less work in process inventory, ending
|
146,750
|
148,875
|
|
Cost of goods manufactured
|
$2,040,275
|
$1,997,490
|
shape It Manufacturing Company Income statements For the years ended December 31
|
Sales
Cost of goods sold
|
This
$ 142,640
|
year
$2,942,960
|
Last
$ 184,820
|
year
$3,096,220
|
|
Cost of goods manufactured
|
2,040,275
|
|
1,997,490
|
|
|
Cost of goods available for sale
|
$2,182,915
|
|
$2,182,310
|
|
|
Less finished goods inventory, ending
|
186,630
|
|
142,640
|
|
|
Total
|
|
1,996,285
|
|
2,039,670
|
|
Gross margin
Selling and administrative expenses: Sales salaries and commissions
|
$ 394,840
|
$ 946,675
|
$ 329,480
|
$1,056,550
|
|
Advertising expense
|
116,110
|
|
194,290
|
|
|
Other selling expenses
|
82,680
|
|
72,930
|
|
|
Administrative expenses
|
242,600
|
|
195,530
|
|
|
Total selling and administrative expenses
|
|
836,230
|
|
792,230
|
|
Income from operations Other revenues and expenses:
Interest expense
|
|
$ 110,445
54,160
|
|
$ 264,320
56,815
|
|
Income before income taxes
|
|
$ 56,285
|
|
$ 207,505
|
|
Income tax expense
|
|
19,137
|
|
87,586
|
|
Net income
|
|
$ 37,148
|
|
$ 119,919
|
Required:
1. In preparing your comments, compute the following ratios for each year:
a. Ratios of cost of direct materials used to total manufacturing costs, direct labor to total manufacturing costs, and total overhead to total manufacturing costs. (Round to one decimal place.)
b. Ratios of sales salaries and commission expense, advertising expense, other selling expenses, administrative expenses, and total selling and administrative expenses to sales. (Round to one decimal place.)
c. Ratios of gross margin to sales and net income to sales. (Round to one decimal place.)
2. From your evaluation of the ratios computed in 1, state the probable causes of the decline in net income.
3. What other factors or ratios do you believe should be considered in determining the cause of the company's decreased income?