According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 4.8 percent between 2009 and 2010. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended

December 31, 2010.

Required:
1. Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages (rounded to one decimal place). How did the change in computer prices compare to the changes in Computer Tycoon’s sales revenues?
2. Conduct a vertical analysis by expressing each line as a percentage of total revenues (round to one decimal place). Excluding income tax, interest, and operating expenses, did Computer Tycoon earn more profit per dollar of sales in 2010 compared to2009?

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2010 2009 Sales Revenue Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses Interest Expense Income before Income Tax Expense Income Tax Expense Net Income $100,000 60,000 40,000 36,000 500 3,500 1,000 $ 2,500 $120,000 71,500 48,500 37,000 475 11,025 5,000 $ 6,025