Financial Performance Measures
Tarbox Manufacturing Company makes sheet metal products for heating and air conditioning installations. For the past several years, the company’s income has been declining. Its statements of cost of goods manufactured and income statements for 20×9 and 20×8 follow. You have been asked to comment on why the ratios for Tarbox’s profitability have deteriorated.
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?