|For the year ending December 31|
|Maintenance and Repairs||6,000.00||7,500.00||4,300.00|
|Net Income / (Loss)||2,700.00||(5,650.00)||5,140.00|
|1. Compute for the gross margin ratio for each years and comment on the trend.|
|2. Make a
recommendation on how could Abella Company can improve earnings.|
In making a comparative analysis, management can use two methods to evaluate the performance of the business. These are the common-size or vertical method, which evaluates the relationship or impact of each financial component to one another, and the trend or horizontal analysis, which determine how each component changes over a period. Both of these methods helps the management assess the flow of the business and develop a strategic plan for improvement.
Using the comparative income statement of Abella Company, we perform the vertical and horizontal analysis. The figure reflects Abella’s inconsistency in terms of profitability. In 2011 and 2013, the company managed to earn positive amount but in 2012, the result of operation is net loss. The net margin ratios for the three years are as follows, 13.56%, -15.92%, and 6%. Abella seems to have a problem in 2012 wherein their sales dropped by 6.33% compared to 2011 sales, while operating expenses increases in big margin. Although the company managed to post a net income in 2013, it is still a downward trend as compared to 2011 result of operation.
Looking at the breakdown of all the expenses incurred by Abella for the past three years, most of the cost came from the salaries, rental, and maintenance. These three components comprises more than 60% of the total expenses, thus, most of the revenues were used to pay them. Although the rental cost does not change, there were a significant change in the amount of salaries and maintenance for the year 2012 and 2013. The company’s expenses are constantly increasing while the sales remain flat.
Therefore, the management needs to revisit the component of the salaries and the maintenance expenses. The change in the operating salaries should reflect in the earnings or sales volume the company has. In addition, the company must check if there is a need to buy new facilities rather than having them repaired. New equipment will contribute better in sales generation rather than fixing old machines that requires added expenses.