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Assume Adams Distributors' Operating Expenses are essentially fixed-that is, they will not change significantly in the...

Assume Adams Distributors' Operating Expenses are essentially fixed-that is, they will not change significantly in the case of either an increase or decrease in sales. Assume also that competition prevents Adams from increasing its prices and also from finding cheaper goods to sell, so that the Gross Profit ratio (percentage) is also fixed constant at any level of sales.

  1. If Adams is able to increase Net Sales by 20%, what will be the impact on its net income before taxes?
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Answer #1

In this case if Adams, is able to increase the net sales by 20%, it will be just increasing the variable cost for the company and it will mean that fixed cost is going to remain the same because of high operating expenses that are mostly fixed, and it will lead to higher percentage of net income before taxes even if it is not able to charge very high price for it's goods.

The amount of contribution which is attributed to the overall sales will be the making the amount of profit higher, because the level of fixed cost will be similar and it will lead to higher profits so it can be said that increasing of the level of sales will mean that fixed cost are remaining constant and only the variable cost will be reflecting the increase in cost so the overall profit will be increasing.

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