The following income statement data (in millions) for Dell Inc. and Hewlett-Packard Company
(HP) were taken from their recent annual reports:
Dell Hewlett-Packard
Net sales $ 61,101 $118,364
Cost of goods sold (expense) (50,144) (89,592)
Operating expenses (7,767) (17,970)
Operating income (loss) $ 3,190 $ 10,802
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................................................ $ 61,101 100.0%
Cost of goods sold ................................... (50,144) 82.1
Operating expenses ................................. (7,767) 12.7
Operating income (loss) .......................... $ 3,190 5.2%
b. Hewlett-Packard Company (HP)
Amount Percent
Net sales................................................ $118,364 100.0%
Cost of goods sold ................................... (89,592) 75.7
Operating expenses ................................. (17,970) 15.2
Operating income (loss) .......................... $ 10,802 9.1%
c. Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of
goods sold of 75.7% is significantly less (6.4%) than Dell’s cost of goods sold
of 82.1%. This is partially offset by HP’s higher operating expenses of 15.2%
as compared to Dell’s operating expenses of 12.7%. The net result is that HP
generates an operating income of 9.1% of sales, while Dell generates operating income of 5.2% of sales. Dell must improve its operations if it is to remain
competitive with HP.
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