Question

From the income statement below, what could be a reason for "Net Income" to increase if...

From the income statement below, what could be a reason for "Net Income" to increase if everything else remains the same?

Income Statement

\$15,000 Net Sales

\$  4,500 Cost of Goods Sold

\$10,500 Gross Profit

\$ 3,500 Operating Expense

\$ 7,000   Net Income Before Tax

\$ X,XXX   Income Tax @ 25%

\$ X,XXX  Net Income (Loss)

 Increase in income tax Decrease in gross profit Decrease in operating expense Increase in cost of goods sold (COGS)

Answer is Decrease in Operating Expenses

Justification - Any decrease in Operating Expenses tend to increase the profit before tax which will increase net income.

Let's elaborate

Current Profit before Tax = 7000

Tax = 7000 *0.25 = 1750

Profit after tax = 7000 - 1750 = 5250

Now say operating expenses decreases by 500

New profit before tax = 7000 + 500

= 7500

Tax = 7500 * 0.25 = 1875

New Income = 5625

Hence proved decrease in Operating expenses will increase the net income whereas all other options will decrease the net income by any means.