Dell Hewlett-Packard Net sales $61,494 $126,033 Cost of goods sold (expense) (50,098) (96,089) Operating expenses (7,963) (18,465) Operating income (loss) $ 3,433 $ 11,479
a. Prepare a vertical analysis of the income statement for Dell. Round to one decimal place.
b. Prepare a vertical analysis of the income statement for HP. Round to one decimal place.
c. Based on (a) and (b), how does Dell compare to HP?
Answer:
a. Dell Inc. Amount Percent Net sales $61,494 100.0% Cost of goods sold (50,098) 81.5% Operating expenses (7,963) 12.9% Operating income (loss) $ 3,433 5.6% b. Hewlett-Packard Company (HP) Amount Percent Net sales $126,033 100.0% Cost of goods sold (96,089) 76.2% Operating expenses (18,465) 14.7% Operating income (loss) $ 11,479 9.1%
c. Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of goods sold of 76.2% is 5.3% (81.5% – 76.2%) less than Dell’s cost of goods sold. This is partially offset by HP’s higher operating expenses of 14.7% as compared to Dell's operating expenses of 12.9%. The net result is that HP generates an operating income of 9.1% of sales, while Dell generates operating income of 5.6% of sales. Dell must improve its operations if it is to remain competitive with HP.