The following income statement data (in millions) for Dell Inc. and Hewlett-Packard Company (HP) were taken

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 $61,494 $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.