Carr Auto Wholesalers had sales of $900,000 in 2008 and their cost of goods sold represented 65 percent of sales. Selling and administrative expenses were 9 percent of sales. Depreciation expense was $10,000 and interest expense for the year was $8,000. The firm's tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Hood, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 12 per-cents of sales, sales can be increased to $1,000,000. The extra sales effort will also reduce cost of goods sold to 60 percent of sales. Depreciation expense will remain at $10,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $15,000. The firm's tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms.Hood's suggestions for Carr Auto Whole-salers. Will her ideas increase or decrease profitability?