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Exercise 6-12 Cause-of-change analysis (LO6-1)

Following are income statements for Hossa Corporation for 20X1 and 20X2. Percentage of sales amounts are also shown for each operating expense item. Hossas income tax rate was 22% in 20X1 and 24% in 20X2.

	20X1		20X2
($ in millions)	$ in millions		% of sales		$ in millions		% of sales
Sales	$	5,500.0							$	6,500.0
Cost of sales		(2,475.0	)			45	%			(3,055.0	)			47	%
Other operating expenses		(825.0	)			15	%			(1,040.0	)			16	%
Operating income		2,200.0								2,405.0
Provision for income taxes		(484.0	)							(577.2	)
Net income	$	1,716.0							$	1,827.8
Income tax rate		22	%							24	%

Hossas management was pleased that 20X2 net income was up 6.5% from the prior year. Although you are also happy with the increase in net income, you are not so sure the news is all positive. You have modeled Hossas income as follows:

NET INCOME = SALES (1 COGS% OPEX%) (1 TAX RATE)

Using this model, net income in 20X1 is computed as $5,500 (1 45% 15%) (1 22%) = $1,716.0. Net income in 20X2 is computed as $6,500 (1 47% 16%) (1 24%) = $1,827.8.

Required:

Prepare a cause-of-change analysis to show the extent to which each of the following items contributed to the $111.8 million increase in Hossas net income from 20X1 to 20X2: (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place. Negative amounts should be indicated by a minus sign.)

• Increase in sales (SALES)
• Increase in cost of sales as a percent of sales (COGS%)
• Increase in other operating expenses as a percent of sales (OPEX%)
• Increase in income tax rate (TAX RATE)

1)($ in millions)Net income 20X1 $111.8m selected answer incorrect

2) Effect of increase in sales 186.0m selected answer incorrect

3)Effect of increase in COGS(15.6)selected answer incorrect

4)Effect of increase in OPEX (31.2)selected answer incorrect

5)Effect of increase in tax rate13.0 selected answer incorrect

6) Increase in net incorrect 152.2m

7)Net income -20X2 not attempted 0