Profits and Loss Statement Analysis

PROFITS AND LOSS STATEMENT ANALYSIS

From the extracts of the profit and loss statement of Sidcup Furnishings Ltd. from the years 2002 to 2005, the direct materials cost have notably fluctuated in the years observed, evidenced in the increase in 2002 to 2004 and experiencing a significant decrease in 2005, largely due to the changes experienced in the price of hardwood, the raw material used for making Sidcup's products. Additionally, the trend in production for the overall hardwood furniture industry must be viewed in light of the underlying trend movements of another competing industry: metal furniture. The decided shift of consumers from hardwood to metal has significantly impacted the industry, making hardwood prices fluctuate like it did. The direct labour, on the other hand, represented the largest component of the direct costs incurred by the company and is consistent so throughout the four years of observation. This is somewhat caused by the hiring of additional temporary employees when the need for it arises. The trend in the costs in the direct labour is markedly proportional to the trend in the costs of direct materials, as well as factory overhead and other overheads costs, which should normally be the case. However, a noted decrease in the direct labour cost of 2004 is incompatible with the overall movement of the profit and losses of the company, an incompatibility observed which would translate as opportunities for the company to save on direct labour costs.

Annual profits for Sidcup has followed the trend of the production costs, which should not be the case since the longer a company operates, the more it should be able to control its costs to reflect a change on profit for the company. This downturn of profits can be attributed to product proliferation, which is a problem within the hardwood furniture industry. This has hindered the introduction of special purpose and highly efficient machinery and equipment, and while the industry finds it relatively easy to drop product lines and styles, hardwood furniture companies must maintain the capacity to produce old as well as new product lines. This problem is particularly acute in the more expensive wood office furniture lines. Reorders of wood furniture must match style as well as wood grain pattern and colour (which may not be the same as when the pieces were new). Additionally, the industry was influenced by different economic factors over the period studied. It was very much affected by cyclical changes in the economy. Expansions or contractions in output and associated changes in profit in this component can be very closely tied to changes in the growth of new residential and commercial construction, because furniture is generally purchased when families move into new homes or when offices are newly opened. In periods when the economy is suffering from downturns and especially when new residential and commercial construction slows down in expansion, this component of the industry registers small gains in output and, in turn, insignificant gains in profit. Conversely, when the overall economy booms, and especially when new residential and commercial construction increases, output in this industry is alive or posts increases and profits also tends to rise.

Following is the profit margin for the company from what available information has been provided for in the excerpt from the income statement for four years in £000s.

PROFIT MARGIN 2002

=

NET INCOME 2,430

=

SALES 22,680

10.7 or 11%

PROFIT MARGIN 2003

=

NET INCOME 3,570

=

SALES 25,830

13.8 or 14%

PROFIT