Reference no: EM13890528

Shape It Manufacturing Company makes sheet metal products. For the past several years, the company's income has been declining. Its statements of cost of goods manu- factured and income statements for the last two years are shown here. Review and com- ment on why the ratios for Shape It's profitability have deteriorated.

Direct materials used:

shape It Manufacturing Company statements of Cost of goods Manufactured For the years ended December 31

	This year	Last year
Materials inventory, beginning	$ 91,240	$ 93,560
Direct materials purchased (net)	987,640	959,940
Cost of direct materials available for use	$1,078,880	$1,053,500
Less materials inventory, ending	95,020	91,240
Cost of direct materials used	$ 983,860	$ 962,260
Direct labor	571,410	579,720
Total overhead	482,880	452,110
Total manufacturing costs	$2,038,150	$1,994,090
Add work in process inventory, beginning	148,875	152,275
Total cost of work in process during the period	$2,187,025	$2,146,365
Less work in process inventory, ending	146,750	148,875
Cost of goods manufactured	$2,040,275	$1,997,490

shape It Manufacturing Company Income statements For the years ended December 31

Sales Cost of goods sold	This   $   142,640	year $2,942,960	Last   $   184,820	year $3,096,220
Cost of goods manufactured	2,040,275		1,997,490
Cost of goods available for sale	$2,182,915		$2,182,310
Less finished goods inventory, ending	186,630		142,640
Total		1,996,285		2,039,670
Gross margin Selling and administrative expenses: Sales salaries and commissions	$   394,840	$    946,675	$   329,480	$1,056,550
Advertising expense	116,110		194,290
Other selling expenses	82,680		72,930
Administrative expenses	242,600		195,530
Total selling and administrative expenses		836,230		792,230
Income from operations Other revenues and expenses: Interest expense		$   110,445   54,160		$   264,320   56,815
Income before income taxes		$      56,285		$   207,505
Income tax expense		19,137		87,586
Net income		$      37,148		$   119,919

Required:

1. In preparing your comments, compute the following ratios for each year:

a. Ratios of cost of direct materials used to total manufacturing costs, direct labor to total manufacturing costs, and total overhead to total manufacturing costs. (Round to one decimal place.)

b. Ratios of sales salaries and commission expense, advertising expense, other selling expenses, administrative expenses, and total selling and administrative expenses to sales. (Round to one decimal place.)

c. Ratios of gross margin to sales and net income to sales. (Round to one decimal place.)

2. From your evaluation of the ratios computed in 1, state the probable causes of the decline in net income.

3. What other factors or ratios do you believe should be considered in determining the cause of the company's decreased income?