Riordan Manufacturing: Profit and Loss Statement Analysis BSA/310 An effective indicator of a business’s overall performance and efficiency is the profit and loss statement. A profit and loss statement, more commonly referred to as an income statement, is a report of the changes in the income and expense accounts over a specific period of time. It provides a valuable source for identifying marketing trends, understanding the strengths and potential weak areas of a business, and measuring the efficiency of operations. This paper will analyze the income statement and financial status of Riordan Manufacturing, Inc.
Riordan Manufacturing is a global plastics manufacturer with 550 employees and projected annual earnings of $46 million. The company is owned entirely by Riordan Industries, a Fortune 1000 enterprise with over $1 billion in revenues. Its products include plastic beverage containers produced in Georgia, custom plastic parts produced in Michigan, and plastic fan parts produced in China. The company’s research and development is done at the corporate headquarters in California. Riordan’s major customers include aircraft and automotive part manufacturers, the Department of Defense, and appliance manufacturers (Riordan Manufacturing 1).
In the last few years, Riordan has a managed sales data electronically. Available sales information includes order, delivery, and payment dates by order. Additional sales information also available includes the unit and dollar volume of each product and sales by customer to include price paid, cost, margin, and any discount given. The marketing department, with the support of the finance and production departments, maintains profit and loss statements, by item and by group. According to Riordan’s income statement for the 2004-2005 fiscal year, the company increased sales by nearly $4. million in comparison to the previous year (1). However, this increase in revenue does not necessarily indicate an increase in profits. The direct cost of goods sold at the end of the 2005 fiscal year is over $4. 5 million more than the cost of goods sold at the start of the year. The difference between the sales, or revenue, and the direct cost of goods sold, is used to calculate the gross profit margin. The gross profit margin is the amount of profit generated before overheads and other expenses are taken into account.
The gross margin at the end of the 2005 was $8,786,061, which is $221,823 more than the gross margin generated the previous year (Riordan Manufacturing 1). With an increase in sales over a 12-month period, the company experienced only a slight increase in gross profit margin. To increase their gross margin, Riordan may consider a slight increase in product cost. Even a small percentage increase in product cost to consumers, the company can increase gross profit margin substantially. Before determining the company’s net profit, operating and non-operating expenses must be deducted from the gross profit margin.
Riordan’s operating expenses include: Sales, Marketing, & Other expenses, Depreciation of equipment necessary for production, Quality Assurance, Research & Development, General & Administrative, and Machining & Systems expenses. Sales and marketing expenses include advertisements, promotional discounts, and similar expenses that do not generate revenue directly, but attempt to increase future sales and establish a larger clientele. The sales and marketing expenses incurred for the year were $1,012,974, which is $92,088 more than the previous year (Riordan Manufacturing 1).
Although the sales and marketing expenses were higher, the revenue generated from sales was substantially higher. However, with the cost of products seemingly the same as the previous year, and the cost of goods sold increasing by approximately 1. 5%, the potential for a significant increase in profits was minimal. Riordan’s depreciation expense represents the monetary amount that the company loses each year as the value of its fixed assets declines over a period of time, or the asset’s useful economic life. Depreciation can be calculated in two ways.
The first method is known as the straight-line depreciation method, in which depreciation is calculated by subtracting the current residual value of the asset from its initial cost, and then dividing that amount by the number of years the asset has been in use (Income Statement 1). The second method is known as the reducing balance method, in which a fixed annual depreciation percentage is applied to the value of the asset each year (Income Statement 1). The depreciation expense incurred by Riordan was $343,445 (Riordan Manufacturing 1).
Quality assurance and research and development expenses totaled $1,139,668 and $911. 676, respectively. General and administrative expenses were $1,706,953 and machining and systems expenses totaled $628,505. Adding up all operating expenses results in a total of $5,743,241. Taking the gross profit margin based on the difference between sales and the cost of goods sold, the company’s profit before interest and taxes for the year totals $3,042,820 (Riordan Manufacturing 1). Non-operating expenses include interest expense and taxes based on a percentage of the company’s profits after operating expenses.
The interest expense for the year was $143,175 and the amount of taxes paid was $943,274. The interest expenses and taxes totaled $1,086,449. Subtracting these non-operational expenses from the company’s profit before interest and taxes, Riordan’s net profit for the year was $1,956,371. Riordan’s net profit for the year was approximately $34,000 less than the previous year (Riordan Manufacturing 1). After evaluating Riordan’s income statement, the company experienced a decrease in profits due to its increase in sales.
An increase in sales would typically result with an increase in profits; however, with the slight increase in the cost of goods sold, the company was actually paying more to sell more products. In addition to the increase in the cost of goods sold, the increase in sales resulted in an increase in production, which increases operating expenses. Non-operating expenses were less than the previous year only because Riordan did not generate as much profit before interest and taxes as the previous year.
Riordan should consider increasing the purchasing cost to consumers to compensate for the increase in the cost of goods sold. Sales and marketing expenses appeared to have a positive effect on sales, while other expenses were proportional to the amount of production. References Apollo Group, Inc. (2006). Riordan Manufacturing. Retrieved October 3, 2011, from https://ecampus. phoenix. edu/secure/aapd/cist/vop/Business/Riordan/Finance/RioFandA001. htm Income Statement. (2008). In Tutor2U. Retrieved October 3, 2011, from