According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 8.1 percent between 2012 and 2013. Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2013.
2013 2012
Sales Revenue..............................................$100,000.............$120,000
Cost of Goods Sold..........................................60,000................71,500
Gross Profit....................................................40,000................48,500
Selling, General, and Administrative Expenses...........36,000................37,000
Interest Expense...................................................500....................475
Income before Income Tax Expense.........................3,500................11,025
Income Tax Expense............................................1,000.................5,000
Net Income....................................................$ 2,500...............$ 6,025
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 2013 compared to 2012?