Question

The Sports Warehouse operates in two distinct segments; equipment and apparel. The income statements for each operating segment are presented below.

............ AMOUNT %........ Amount %.........
sales $1,700,000 $2,850,000
Cost of goods sold 1,100,000 1,400,000
Gross profit 600,000 1,400,000
Operating expenses 250,000 500,000
operating income 350,000 950,000
other income (expenses) 25,000 (60,000)
income before tax 375,000 890,000
income tax expense 90,000 280,000
net income $285,000 610,000

Required:
1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. (Round your answers to 1 decimal place.)
2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?

a) Apparel
b) Equipment

Answer 1

Answer:

1.

Vertical analysis of The Sports Warehouse's two operating segments.

                                         Equipment                 Apparel

                                       Amount$       %        Amount$        %

sales                                1,700,000   100       2,850,000     100

Cost of goods sold         1,100,000    64.7     1,400,000      49.1

Gross profit                     600,000     35.3     1,450,000       50.9      

Operating expenses      250,000      14.7      500,000         17.5

operating income           350,000      20.6     950,000        33.3

other income/expenses 25,000        1.50      (60,000)         2.1

income before tax          375,000       22.1      890,000        31.22

income tax expense       90,000        5.30     280,000        9.8

net income                      285,000      16.8      610,000        21.4

2.

The a) Apparel segment is more profitable than the b) Equipment segment

Explanation:

1.

Vertical analysis ios made by taking a percentage of each lsited items of income statement to a base value. Normally the base value is the sales value. In this question I have calculated all the percentage based on the sales value.

2.

Gross Margin

By comparing the Gross margin of both segments, 50.9% of apparel is more than that of 35.3% of Equipment. So, Apparel segment is more profitable.

Net Margin

By comparing the Net margin of both segments, 21.4% of apparel is more than that of 16.8% of Equipment. So, Apparel segment is more profitable.

Answer 2

Answer 1.

Vertical analysis of The Sports Warehouse's two operating segments.

                                               Equipment                 Apparel  

    Enteries                       Amount ($)      %        Amount ($)       %  

• Sales                                1,700,000   100       2,850,000     100  

• Cost of goods sold         1,100,000    64.7     1,400,000      49.1  

• Gross profit                     600,000     35.3     1,450,000       50.9        

• Operating expenses      250,000      14.7      500,000         17.5  

• Operating income           350,000      20.6     950,000        33.3  

• Other income/expenses 25,000        1.50      (60,000)         2.1  

• Income before tax          375,000       22.1      890,000        31.22  

• Income tax expense       90,000        5.30     280,000        9.8

         Net Income                      285,000      16.8      610,000        21.4  

Answer 2 :

 a) Apparel segment  

• According to the vertical analysis is the Apparel segment is more profitable than the Equipment segment to compare the profitability of the two operating segments.

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