Are common size statements build on a per unit basis or a total basis?
I don’t quite understand the question.
When you say “per unit”, what do you think that the units might be?
When you say “total”, what total do you mean?
The units are the product that the company is selling, so basically selling price or cost per unit
Total means total Sales/COGS/Gross Margin numbers (P*Q)
Common-size statements are total statements.
In a vertical, common-size income statement, everything is divided by (total) net sales.
In a vertical, common-size balance sheet, everything is divided by total assets.
In horizontal, common-size financial statements, every account is divided by the value of that account in the base year.
Sales have been 250 million units at $1.00 per unit.
Then, the company plans to decrease sale price to $0.90 but expected 500 million units to be sold at this price.
COGS was 60% of sales, and they say COGS is expected to hold with the new sales scenario.
I am confused on how they got a $50 million increase for gross income under the new sales scenario.
Original - Sales - 250 Mn, COGS (0.6*250Mn) - 150 Mn, Gross Income - 100 Mn
New - Sales - 450 Mn, COGS (0.6*500 Mn) - 300 Mn, Gross Income - 150 Mn
Increase in Gross Income - 50 Mn
Not gross income; gross _ profit _.
Per unit COGS = $1.00 × 60% = $0.60.
Original sales = 250 million × $1.00 = $250 million.
Original COGS = 250 million × $0.60 = $150 million.
Original gross profit = $250 million − $150 million = $100 million.
New sales = 500 million × $0.90 = $450 million.
New COGS = 500 million × $0.60 = $300 million.
New gross profit = $450 million − $300 million = $150 million.
Increase in gross profit = $150 million − $100 million = $50 million.
Fixed.
But when the scenario changed, you still held COGS constant on a per unit basis.
How come the answer is not $450 * 0.4 = $180?
You lowered your prices. Does that automatically make it cheaper to produce?
So I am assuming the common size proportions do not have to hold under the new scenario?
Of course not.