Question

The Haines Corp. shows the following financial data for 20X1 and 20X2:

	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

For each year, compute the following and indicate whether it is increasing or

decreasing profitability in 20X2 as indicated by the ratio:

c. Interest expenses to sales

Short answer

Interest expenses to sales for 20X1 and 20X2 are 1.46% and 1.53%, respectively. It is increased by 0.07%.

Step-by-step solution

Interest expenses to sales for the year 20X1

$\begin{array}{rcl}\mathrm{Interest}\mathrm{expenses}\mathrm{to}\mathrm{sales}\left(20\mathrm{X}1\right)& =& \frac{\mathrm{Interest}\mathrm{Expense}}{\mathrm{Sales}}\\ & =& \frac{\$47,200}{\$3,230,000}\\ & =& 1.46\%\end{array}$

Interest expenses to sales for the year 20X2

$\begin{array}{rcl}\mathrm{Interest}\mathrm{expenses}\mathrm{to}\mathrm{sales}\left(20\mathrm{X}2\right)& =& \frac{\mathrm{Interest}\mathrm{Expense}}{\mathrm{Sales}}\\ & =& \frac{\$51,600}{\$3,370,000}\\ & =& 1.53\%\end{array}$

Change in Interest expenses to sales ratio

$\begin{array}{rcl}\mathrm{Change}\mathrm{in}\mathrm{ratio}& =& \mathrm{Interest}\mathrm{expenses}\mathrm{to}\mathrm{sales}\left(20\times 2\right)-\mathrm{Interest}\mathrm{expenses}\mathrm{to}\mathrm{sales}\left(20\times 1\right)\\ & =& 1.53\%-1.46\%\\ & =& 0.07\%\end{array}$