Question

The Sports Warehouse operates in two distinct segments; equipment and apparel. The income statements for each operating segment are presented below.
............ AMOUNT %........ Amount %.........
sales $1,700,000 $2,850,000
Cost of goods sold 1,100,000 1,400,000
Gross profit 600,000 1,400,000
Operating expenses 250,000 500,000
operating income 350,000 950,000
other income (expenses) 25,000 (60,000)
income before tax 375,000 890,000
income tax expense 90,000 280,000
net income $285,000 610,000

Required:
1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. (Round your answers to 1 decimal place.)
2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?

a) Apparel
b) Equipment

Answer 1

Answer:

1.

Vertical analysis of The Sports Warehouse's two operating segments.

                                         Equipment                 Apparel

                                       Amount$       %        Amount$        %

sales                                1,700,000   100       2,850,000     100

Cost of goods sold         1,100,000    64.7     1,400,000      49.1

Gross profit                     600,000     35.3     1,450,000       50.9      

Operating expenses      250,000      14.7      500,000         17.5

operating income           350,000      20.6     950,000        33.3

other income/expenses 25,000        1.50      (60,000)         2.1

income before tax          375,000       22.1      890,000        31.22

income tax expense       90,000        5.30     280,000        9.8

net income                      285,000      16.8      610,000        21.4

2.

The a) Apparel segment is more profitable than the b) Equipment segment

Explanation:

1.

Vertical analysis ios made by taking a percentage of each lsited items of income statement to a base value. Normally the base value is the sales value. In this question I have calculated all the percentage based on the sales value.

2.

Gross Margin

By comparing the Gross margin of both segments, 50.9% of apparel is more than that of 35.3% of Equipment. So, Apparel segment is more profitable.

Net Margin

By comparing the Net margin of both segments, 21.4% of apparel is more than that of 16.8% of Equipment. So, Apparel segment is more profitable.

Answer 2

Answer:

See the explanation below:

Explanation:

1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. (Round your answers to 1 decimal place.)

Vertical analysis can be described as a technique for analyzing financial statement by listing each line item as a percentage of one particular figure in the statement.

The vertical analysis of The Sports Warehouse is presented as follows:

The Sports Warehouse Vertical Analysis

                                      Equipment             Apparel  

Details                                         $              %          $             %  

Sales                                  1,700,000  100.0%  2,850,000  100.0%

Cost Of Goods Sold          1,100,000  64.7%  1,400,000  49.1%

Gross Profit                           600,000  35.3%  1,400,000  49.1%

Operating Expenses           250,000   14.7%     500,000   17.5%

Operating Income               350,000  20.6%     950,000  33.3%

Other Income (Expenses)      25,000   1.5%       (60,000) (2.1%)

Income Before Tax              375,000  22.1%      890,000  31.2%

Income Tax Expense             90,000   5.3%       280,000  9.8%

Net Income                           285,000  16.8%      610,000  21.4%

2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?

The two relevant profitability ratios in (1) above are gross profit margin ratio and net profit margin ratio.

Gross profit margin ratio is the ratio of the gross profit to the sales revenue, while the net profit margin ratio is the ratio of the net profit margin to sales revenue.

Based on the gross profit margin ratio, apparel segment is more profitable than the equipment segment because its gross profit margin of 49.1% is higher than 35.3% recorded by the equipment segment.

Based on the net profit margin ratio, apparel segment is still more profitable than the equipment segment because its net profit margin of 21.4% is higher than 16.8% recorded by the equipment segment.