Question

Which would you rather have?

• An increase in Sales of $1.00 with the same %-Sales cost structure

• Same Sales level but decrease expenses by $1.00.

Use a simple income statement to support your choice.

Answer 1

We would calculate net income under both the alternatives Assuming sales is $10 and cost is $5 which mean cost is 50% of sales Calculation of net income under alternative 1 Sales Cost Net income Calculation of net income under alternative 2 Sales Cost Net income $11.00 $5.50 $5.50 $10.00 $4.00 $6.00 The second option of decrease in expense by $1 is preferred as this increases the net income of company.

Under alternative 1, the increase in sales would also increase the cost of business and thus net income would be lower