Week 3 Expense Distribution

Expense Distribution

(see Amalgamated Hat Rack’s income statement for 2016 below)

Retail Sales		$2,200,000
Corporate Sales		$1,000,000
	Total Sales Revenue	$3,200,000
Less: Cost of Goods Sold		$1,600,000
	Gross Profit	$1,600,000
Less: Operating Expenses		$800,000
Depreciation Expense		$42,500
	Earnings before Interest and Taxes	$757,500
Less: Interest Expense		$110,000
	Earnings before Income Taxes	$647,500
Less: Income Tax		$300,000
	Net Income	$347,500

Table: Amalgamated Hat Rack Income Statement Statement for Fiscal Year Ending December 31, 2016
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002) Updated.

Amalgamated hat Rack took in over $3 million in sales in 2016 and ended up with just under $350,000 in profits. This might cause you to wonder what expenses the company spent most of that $3 million in sales revenue on. You can determine that by listing the expenses and plotting them on a pie chart as shown below.

			FY 2016
Major Expenses:
	Costs of Goods Sold		$1,600,000
	Operating Expenses		800,000
	Depreciation		42,500
	Interest Expense		110,000
	Income Tax		300,000
	Total:		$2,852,500

 Hat Rack Expense Distribution.pdf Download Hat Rack Expense Distribution.pdf

Looking at the chart, you can see that Amalgamated’s largest expense in 2016 was Cost of Goods Sold, followed by Operating Expenses. This is about what you would expect for a manufacturing company. Amalgamated’s Cost of Goods Sold was 56% of its total expenses and 50% of its 2011 revenues.

Question: Is this good or bad?

Answer: Can’t tell without comparing Amalgamated’s expense distribution with that of other hat rack companies. This illustrates again that almost everything in financial analysis is relative.