Question

west company

Student services Faculty area | Library Office 365 Christine Yvonne van Gorp rses - unity ered 18 Analyze the common size income statements below, for West Company. How has the company's gross margin evolved from 2017 to 2018 and what are possible reasons for such evolution? How has the company's operating income evolved from 2017 to 2018 and what are possible reasons for such evolution? Elaborate on the sustainability of recent changes in operating expenses. How has the company's interest expense impacted its net income from 2017 to 2018 and what are possible reasons for such evolution in terms of the company's sources of funding? 2018 2017 2018 100 100 71 30 0 In percentage Net sales COGS Gross margin Research and development expenses Selling, General and Admin. Expenses Restructuring, impairments and others Operating income Interest expense EBT Taxes expense Net income 29 8 10 0 Il solo = = sa = 00w i . BIE 3 | auto.proctoru.com is sharing your screen.

Answer 1

1. Gross Margin = Net Sales – Cost of Goods Sold (COGS)

Net sales in year 2017 and 2018 are same i.e. 100. However, COGS has been increased in 2018 by 1, due to which Gross Margin for year 2018 has been reduced by 1 in comparison to Year 2017.

Thus, Reasons for Gross Margin Evolution are COGS.

2. Operating Income = Gross Margin- R&D Expenses-Selling, Admin. & General Exp.-Restructuring, Impairment & Others Expenses.

R&D Expenses in Year 2017 was 11, however in year 2018 the same are 8. Thus, the Expenses are reduced by 3 in year 2018.

Selling, General and Admin Expenses in Year 2017 was 11, however in year 2018 the same are 10. Thus, the Expenses are reduced by 1 in year 2018.

Restructuring, Impairments, and others Expenses in Year 2017 was 8, however in year 2018 the same are NIL. Thus, the Expenses are reduced by 8 in year 2018.

Thus, Total Expenses reduced in Year 2018 in comparison to Year 2017 are 3+1+8 = 12 and Increase in COGS in Year 2018 in comparison to year 2017 is of 1. Accordingly, Net Benefit in Year 2018 is of 12-1 = 11.

Thus, the reasons for Operating Income Evolution are as Explained above.

3. Interest Expenses in Year 2017 was 1. However, the same is 3 in Year 2018. Thus, Interest Expenses has been Increased by 2 in Year 2018. Further, due to Increase in Interest Expenses Tax has been saved on that expenses. Tax Rate is of 25% (8/2*100). Tax saved is of 0.75 (3*25%) on such Interest Expenses.

Thus, Impact of Interest Expenses on Net income is of 2.25 (3-0.75). I.e. Net Income is Reduced by 2.25 in year 2018.