Question

Analyzing Operational Changes

Operating results for department B of Delta Company during 2019 are as follows:

Sales $540,000

Cost of goods sold 378,000

Gross profit 162,000

Direct expenses 120,000

Common expenses 66,000

Total expenses 186,000

Net loss $(24,000)

If department B could maintain the same physical volume of product sold while raising selling prices an average of 5% and making an additional advertising expenditure of $30,000, what would be the effect on the department’s net income or net loss? (Ignore income tax in your calculations.) Use a negative sign with your answer to indicate if the effect increases the company's net loss. If Department B increased its selling price by 5%, the effect on net income (loss) would be $Answer

Answer 1

Particulars	Amount	Calculation
Sales	567,000	540,000 * 105%
( - ) Cost of Goods Sold	378,000
Gross Profit	189,000
( - ) Direct Expenses	120,000
( - ) Common Expenses	66,000
( - ) Advertising Expenses	30,000	New expenses
Net Profit/ (loss)	(27,000)

Note : 1. In the new situation it has been assumed that the volume sold remains same however there is an increase in the sale price by 5%. Thus the sales of $540,000 will get increase by 5% i.e. 105% of $540,000, would give us the sales figures for the current situation.

The net change in the net income is = -27000 - (-24000)

= -27,000 + 24,000

= - 3,000

Answer : Increasing Selling price by 5% would lead to a further decrease in net income by $3000 i.e. answer is - $3000.