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METRIC-BASED ANALYSIS
MBA 4–1
As shown below, purchase transactions have no effect on the liquidity metric
working capital. This is because purchases increase Inventory and Accounts
Payable (purchases on account) or decrease Cash (cash purchases) by the same
amount. As a result, the liquidity metric working capital is unchanged. Since pur-
chase transactions do not involve revenue (sales) or expense (cost of goods
sold), there is also no effect on the profitability metric gross profit percent.
Metric Effects
Liquidit
y
Profitabilit
y
Transaction Workin
g
Capital Gross Profit Percent
Au
g
. 3 No Effect No Effect
MBA 4–2
Metric Effects
Liquidit
y
Profitabilit
y
Transaction Workin
g
Capital
Ability to Achieve Gross
Profit Percent of 30%
Jan. 6 $ 5,600 Increase
(
40.0%
)
1
8
5,800 Decrease
(
29.3%
)
2
16 7,800 Increase
(
40.0%
)
3
18 No Effect No Effect
135
MBA 4–3
Metric Effects
Liquidit
y
Profitabilit
y
g
Capital Gross Profit Percent
MBA 4–4
Metric Effects
Liquidit
y
Profitabilit
y
Transaction Workin
g
Capital
Ability to Achieve Gross
Profit Percent of 30%
July 31 $(7,500) Decrease (55.6%)
Note: The gross profit percent on sales of $13,500 and related cost of goods sold
MBA 4–5
1. Year 2 Year 1
Gross profit percent:
($20,754 ÷ $71,879) ………… 28.9%
($20,350 ÷ $69,495) ………… 29.3%
136
MBA 4–6
The gross profit percents and markup percents for Walmart and Target are
summarized below.
Gross Profit Markup
Percent Percent
Walmart:
Year 1 ………… 25.4% 34.0%
Year 2 ………… 25.1% 33.5%
MBA 4–7
1. Year 2 Year 1
Gross profit percent:
2. Markup percent:
($5,951 ÷ $19,934) …………… 29.9%
($5,138 ÷ $18,249) …………… 28.2%
3. Deere & Company’s financial performance improved slightly from Year 1 to
137
MBA 4–8
1. Year 2 Year 1
Gross profit percent:
($11,627 ÷ $42,676) ………… 27.2%
($7,464 ÷ $35,773) ………….. 20.9%
MBA 4–9
The gross profit percents and markup percents for Deere and Caterpillar are
summarized below.
Gross Profit Markup
Percent Percent
Deere:
Year 1 …………. 22.0% 28.2%
Year 2 …………. 23.0% 29.9%
138
MBA 4–10
1. In order to earn a significant profit, companies with low gross profit and markup
percents must sell more merchandise. Thus, the sales volume is often larger.
2. Kroger Tiffany
Gross profit percent:
($25,835 ÷ $115,337) ……….. 22.4%
($2,491 ÷ $4,105) …………….. 60.7%
3. The results in part (2) for Kroger and Tiffany & Co. support the prior state-
ment. Kroger has a lower gross profit percent and a lower markup percent
139
Case 4–1
Standards of Ethical Conduct for Management Accountants requires manage-
ment accountants to perform in a competent manner and to comply with relevant
Case 4–2
Paul Laurel is correct. The accounts payable due suppliers could be included on
the balance sheet at an amount of $177,000 ($147,000 + $30,000). This is the
amount that will be expected to be paid to satisfy the obligation (liability) to
suppliers. However, this is proper only if Laurel Co. has a history of taking all
140
Case 4–3
1. If Eric doesn’t need the stereo immediately (by the next day), Dynamic Sound
Systems offers the best buy as shown below.
Dynamic Sound Systems:
List price …………………………………………………………………….. $899.99
Shipping and handling (not including next-day air) ………. 13.99
Total …………………………………………………………………………… $913.98
List price …………………………………………………………………….. $890.00
Less 1% cash discount ……………………………………………….. 8.90
Subtotal ……………………………………………………………………… $881.10
Sales tax (6%) ……………………………………………………………… 52.87
Total …………………………………………………………………………… $933.97
If Eric needs the stereo immediately (the next day), then First Audio has the
best price. This is because a shipping and handling charge of $44.99 would
be added to Dynamic Sound Systems’ price as shown below.
141
Case 4–3, Concluded
First Audio price (see previous page) ………………………….. $943.40
Less first installment (down payment) …………………………. 314.47
Remaining balance …………………………………………………….. $628.93
Interest for first month at 1.5% ($628.93 × 1.5%) …………… $ 9.43
The interest savings, however, would not be enough to offset the price ad-
vantage of Dynamic Sound Systems. Dynamic Sound Systems still has a
price advantage of $15.13 ($929.11 – $913.98) over First Audio.
2. Other considerations in buying the stereo include the ability to have the
stereo repaired locally by First Audio. In addition, First Audio employees
Case 4–4
1.
HARBOR READY PARTS COMPANY
Projected Income Statement
For the Year Ended October 31, 20Y7
Revenues:
Sales (a) …………………………………………………………….. $1,380,000
Interest revenue …………………………………………………. 15,000
Total revenues………………………………………………… $1,395,000
Notes:
(a) Projected sales
[$1,200,000 + (15% × $1,200,000)] …………………….. $1,380,000
(b) Projected cost of goods sold
($1,380,000 × 65%) ………………………………………….. $ 897,000
Less delivery expenses ……………………………………… (28,000)
Projected total selling expenses …………………………. $ 110,450
(d) Total administrative expenses for year ended
October 31, 20Y6 …………………………………………….. $ 75,000
Add: Increase in office supplies expense
($4,000 × 15%) …………………………………….. $ 600
143
Case 4–4, Concluded
2. Yes. The proposed change will increase net income from $183,350 to
$290,000, a change of $106,650.
3. Possible concerns related to the proposed changes include the following:
The primary concern is with the accuracy of the estimates used for projecting
the effects of the proposed changes. If the increase in sales does not materi-
alize, Harbor Ready Parts Company could incur significant costs of carrying
excess inventory stocked in anticipation of increasing sales. At the same
time, it is incurring these additional inventory costs, cash collections from
customers will be reduced by the amount of the discounts. This could create
a liquidity problem for Harbor Ready Parts Company.
Case 4–5
Note to Instructors: Answers will vary. The purpose of this activity is to familiarize
students with the variety of possible purchase prices for a fairly common house-
hold item. Students should report several alternative prices when they consider
the source of the purchase and the other factors that affect the purchase, such as
delivery, financing, and warranties.