Question

Analyzing Operational Changes
Operating results for department B of Delta Company during 2016 are as follows:

Sales		$550,000
Cost of goods sold		378,000
Gross profit		172,000
Direct expenses		120,000
Common expenses		66,000
Total expenses		186,000
Net loss		$(14,000)

If department B could maintain the same physical volume of product sold while raising selling prices an average of 15% and making an additional advertising expenditure of $60,000, 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 15%, the effect on net income (loss) would be $Answer

.

Answer 1

If department B could maintain the same physical volume of product sold while raising selling prices an average of 15% and making an additional advertising expenditure of $60,000, what would be the effect on the department's net income or net loss?

Particulars	$	$
Sales		632500
Cost of goods sold		378000
Gross profit		254500
Less:
Direct expenses	120000
Common expenses	66000
Total expenses	186000
Advertisement expenses	60000
Total expenses		246000
Net profit		8500

Net income will increase by $22500                (14000+8500)

If Department B increased its selling price by 15%, the effect on net income (loss) would be

Particulars	$	$
Sales		632500
Cost of goods sold		378000
Gross profit		254500
Less:
Direct expenses	120000
Common expenses	66000
Total expenses		186000
Net income		68500

Net income will increase by $82500