Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon’s income statements through income from operations for two recent years are as follows (in millions):

Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon’s income statements through income from operations for two recent years are as follows (in millions):

Amazon.com, Inc. Operating Income Statements For the Years Ended December 31 (in millions) Year 2 Year 1 Product sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $70,080 $60,903 

Service sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18,908   13,549 

      Total sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,988 $74,452 

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,752 $54,181 

Fulfillment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10,766  8,585 

Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4,332  3,133 

Technology and content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9,275  6,565 

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1,552  1,129 

Other operating expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . .         133         114 

     Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,810 $73,707 

Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $      178 $      745 

a. Prepare a vertical analysis of the two operating income statements. Round percentages to one decimal place.

b.  Use the vertical analysis to explain the decrease in income from operations. 

Answers:

a.

Amount Percent Amount Percent

Product sales$70,080 78.8% $60,903 81.8%

Service sales18,908 21.2% 13,549 18.2%

Total sales$88,988 100.0% $74,452 100.0%

Cost of sales$62,752 70.5% $54,181 72.8%

Fulfillment10,766 12.1% 8,585 11.5%

Marketing4,332 4.9% 3,133 4.2%

Technology and content 9,275 10.4% 6,565 8.8%

General and administrative 1,552 1.7% $ 1,129 1.5%

Other operating expense (income), net 133 0.2% 114 0.2%

Total operating expenses $88,810 99.8% $73,707 99.0%

Income from operations $ 178 0.2% $ 745 1.0%

b. The vertical analysis indicates that the income from operations declined from 1.0% to

0.2% of sales between the two years. Total expenses increased from 99.0% to 99.8%

of total sales. This increase is explained by the increase in fulfillment (11.5% to

12.1%), marketing (4.2% to 4.9%), technology and content (8.8% to 10.4%), and general

and administrative (1.5% to 1.7%) expenses. There was a sizable decrease in the cost

of sales from 72.8% to 70.5% of total sales. However, this decrease was not sufficient 

to offset the increases in the other expenses; thus, total expenses increased and 

income from operations decreased as a percent of total sales between the two

years. Management should investigate the reasons for the expense increases,

paying special attention to technology and content.