A1.a. Horizontal Analysis Results Competition Bikes, Inc. has seen a rather large decrease in net sales from the current period (years 7 and 8) versus the period before (years 6 and 7). The decrease is attributable to the current economic situation. The company expects unit sales to increase over the next three years but to still stay below the high unit sales figure of the 4,000 units sold in 2007. While sales have decreased, the cost of goods sold as a percentage to net sales has remained a constant 73%. This show raw material prices and labor have remained fairly constant. Advertising has been cut 16.3% from the two periods as a result of lower sales. Marketing budgets are usually the first expense to be cut in a downturn market, but are not necessarily the most prudent as companies must still fight hard for the available sales which are present. For general and admin expenses, Competition Bikes has stayed relatively flat to expenses from the previous period to current. Utilities are up 11.1%, probably due to higher energy costs. One area that bears investigation is the line “other general and admin expenses” which is up $12,000 or 7.6% over the period while sales have fallen 15%. The most troubling line is “operating income” which has fallen 69.1% while sales has fallen only the 15%. The fact of fixed overhead, salaries, and utilities, which are paid out whether any sales are brought in, are draining company cash much more than sales percentage decline. It also appears the company’s labor figures have remained steady while sales are declining. A cutback of hours or attrition on the production workforce would allow this figure to trend down with lower production units coming off the assembly line. The operating income decline carries to the bottom line where net earnings have fallen 81.6% over the two periods from $196,294 in 2007, to only