Lemon auto wholesalers had sales of $1,630,000 last year, and cost of goods sold represented 70 percent of sales. selling and administrative expenses were 13 percent of sales. depreciation expense was $14,000 and interest expense for the year was $12,000. the firm’s tax rate is 30 percent.
a. compute earnings after taxes.
b-1. assume the firm hires ms. carr, an efficiency expert, as a consultant. she suggests that by increasing selling and administrative expenses to 15 percent of sales, sales can be increased to $1,680,100. 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 $19,500. 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. (round taxes and earnings after taxes to 1 decimal place.)
b-2. will her ideas increase or decrease profitability?