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Q4. Lemon Auto Wholesalers had sales of $1,000,000 last year and cost of goods sold...

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Finance

Q4. Lemon Auto Wholesalers had sales of $1,000,000 last year and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was $11,000 and interest expense for the year was $8,000. The firms tax rate is 30 percent.

b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to $1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There will be a larger markup in prices because of more aggressive selling.) Depreciation expense will remain at $11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $15,800. The firms tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carrs suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?

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