Discuss all the reasons that might explain an increase or decrease in gross profit.

Question 1

Referencing this week’s readings and lecture, address the following:

• What are the two causes of an increasing or decreasing sales number?

• Discuss all the reasons that might explain an increase or decrease in gross profit.

Question 2

Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation’s profit performance for the period. Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement? What are the causes and effects of Elf’s performance for those three years?

Elf Corporation Income Statements for the Years Ending December 31

(in millions) 2010 2009 2008

Sales $700 $650 $550

Cost of goods sold 350 325 275

Gross profit 350 325 275

Operating Expenses:

Administrative 100 100 100

Advertising and marketing 50 75 75

Operating profit $200 $150 $100

Interest expense 70 50 30

Earnings before tax $130 $100 $ 70

Tax expense (50%) 65 50 35

Net income $ 65 $ 50 $ 35

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