For 2012, Blue Buffalo Company initiated a sales promotion campaign that included the expenditure of an additional $60,000 for advertising. At the end of the year, Tamara Wasnuk, the president, is presented with the following condensed comparative income statement:

Instructions

1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to net sales for each of the years.

2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).

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BLUE BUFFALO COMPANY Comparative Income Statement For the Years Ended December 31, 2012 and 2011 2012 2011 Sales $1,545,000 $1,224,000 Sales returns and allowances 45,000 24,000 $1,500,000 $1,200,000 780,000 $ 420,000 $ 216,000 Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses 960,000 $ 540,000 $ 285,000 90,000 96,000 $ 375,000 $ 165,000 36,000 $ 201,000 $ 312,000 $ 108,000 Total operating expenses Income from operations Other income 36,000 $ 144,000 Income before income tax Income tax expense 42,000 28,800 $ 159,000 $ 115,200 Net income