Question

Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income? answer in your own words, ty

Answer 1

Increase in net income can be achieved by
1. Reduction in costs
2. Increasing in sales revenue and other income.

One of items of costs is purchase and maintenance of inventory.

Impact of purchase of inventory on net income:

If the inventory is managed efficiently and effectively, then it is possible for the organization to increase its net income. If the inventories purchased are sub-standard quality, then it will result in an increase in the number of defective units of production and also frequent shut down of the plant and equipment. If there are more defective items, then the cost of production will increase.

Net income = Sales – Cost of goods sold-Operating and non-operating expenses.

Cost of goods sold (in retail​ organizations) or direct materials costs (in organizations with a manufacturing​ function) as a percentage of sales frequently exceeds net income as a percentage of sales by many orders of magnitude.

For​example, a 10% reduction in the ratio of cost of goods sold to sales without any other changes can result in an increase in net income to sales.