1. Lemon Auto Wholesalers had sales of $880,000 last year, and cost of goods sold
represented 77 percent of sales. Selling and administrative expenses were 12 percent of
sales. Depreciation expense was $17,000 and interest expense for the year was $8,000.
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 14 percent of sales, sales can be increased to
$930,300. The extra sales effort will also reduce cost of goods sold to 73 percent of sales. (There
will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense
will remain at $17,000. However, more automobiles will have to be carried in inventory to
satisfy customers, and interest expense will go up to $15,600. 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. (Round taxes and earnings after taxes to 1 decimal place.) b-2. Will her ideas increase or decrease profitability? Increase profitability
Decrease profitability
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