The following data (in millions) were taken from the financial statements of Costco Whole-sale Corporation:
Recent | Prior
Year | Year
Revenue $116,199 | $112,640
Operating expenses 112,575 | 109,420
Operating income $3,624 | $3,220
a. For Costco, determine the amount of change in millions and the percent of change (round to one decimal place) from the prior year to the recent year for:
1. Revenue
2. Operating expenses
3. Operating income
b. Comment on the results of your horizontal analysis in part (a).
c. Based upon Exercise 2-23, compare and comment on the operating results of Target and Costco for the recent year.
Answer:
a.
1. Revenue:
$3,559 million increase ($116,199 – $112,640)
3.2% increase ($3,559 ÷ $112,640)
2. Operating expenses:
$3,155 million increase ($112,575 – $109,420)
2.9% increase ($3,155 ÷ $109,420)
3. Operating income:
$404 million increase ($3,624 – $3,220)
12.5% increase ($404 ÷ $3,220)
b. During the recent year, revenue increased by 3.2%, while operating expenses increased by 2.9%. As a result, operating income increased by 12.5% from the prior year.
c. Because of the size differences between Target and Costco (Costco has more than 1.6 times the revenue), it is best to compare the two companies on the basis of percent changes from the prior year. Costco's revenues increased by3.2%, while Target's revenues increased by only 1.9%. The expenses of Costco
increased by 2.9%, which is less than the percentage increase in revenues. As a result, Costco's operating income increased by 12.5%. In contrast, Target's expenses increased by 3.0%, which is more than the percentage increase in revenues. As a result, Target's operating income decreased by 12.3%. Overall, Costco had a better operating performance than Target.