Lemon Auto Wholesalers had sales of $1,570,000 in 2013 and cost of goods sold represented 70 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was $14,000 and interest expense for the year was $15,000. The firm’s tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to $1,620,600. The extra sales effort will also reduce cost of goods sold to 66 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at $14,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $22,600. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?