Saunders Corporation Manufactures Consumer Electronics Products Required
A

Essay

Saunders Corporation manufactures consumer electronics products.Selected income statement data for 2009 and 2010 follow (amounts in millions of dollars):
$\begin{array}{|l|r|r|}\hline\text { Saunders Corporation (amounts in } \\\text { millions of dollars) }& \mathbf{2 0 0 9} & \mathbf{2 0 1 0} \\\hline \text { Sales } & 8,296 & 8,871 \\\hline \text { Cost of Goods Sold } & (5,890) & (6,290) \\\hline \text { Selling and Administrative Expenses } & (1,788) & (1,714) \\\hline \text { Operating Income before Income Taxes } & 618 & 867\\\hline\end{array}$
Required
a.The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example,cost of goods sold)by dividing the amount of the change in the cost item between two years by the amount of the change in sales for those two years.The analyst can then multiply total sales by the variable-cost percentage to determine the total variable cost.Subtracting the variable cost from the total cost yields the fixed cost component for that particular cost item.Follow this procedure to determine the cost structure (fixed cost plus variable cost as a percentage of sales)for cost of goods sold for Saunders.
b.Repeat requirement a.for selling and administrative expenses.
c.Saunders Corporation discloses that it expects sales to grow at the following percentages
in future years: Year 1,12 percent; Year 2,10 percent; Year 3,8 percent; Year 4,6 percent.Project sales,cost of goods sold,selling and administrative expenses,and operating income before income taxes for Saunders for Year 1 to Year 4 using the cost structure amounts derived in requirements a.and b.
d.Compute the ratio of operating income before income taxes to sales for Year 1 through Year 4.
e.Interpret the changes in the ratio computed in requirement d.in light of the expected changes in sales.