How much higher or lower would Ryland”s earnings before taxes have been in 2006 if its gross margin…

Real-World Case Analyzing inventory management issues at Ryland Group, Inc.

In 2005, after years of positive growth in the housing market, sales and prices began to slow down and then decline. By 2007 many large home-construction companies were reporting net losses. The data below, for Ryland Group, Inc.’s fiscal years ending on December 31, 2006, and 2005, pertain to analyzing the company’s management of inventory. All dollar amounts are in thousands.

2006

2005

Sales*

$4,653,920

$4,725,751

Cost of goods sold

3,640,075

3,537,603

Ending inventory**

1,735,859

1,188,148

Income before taxes

567,108

721,051

Required

a. Compute Ryland’s gross margin percentage for 2006 and 2005.

b. Compute Ryland average days to sell inventory for 2006 and 2005.

c. Was Ryland’s decline in earnings from 2005 to 2006 affected by either a lower gross margin or lower inventory turnover? Explain.

d. Do you think there may have been a connection between the change in Ryland’s gross margin percentage from 2005 to 2006 and the change in its average days to sell inventory for the same period? Explain.

e. How much higher or lower would Ryland’s earnings before taxes have been in 2006 if its gross margin percentage had been the same as it was in 2005? Show all supporting computations.

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