Question

Sales Analyzing Operational Changes Operating results for department B of Delta Company during 2016 are as follows: $547,000 Cost of goods sold 378,000 Gross profit 169,000 Direct expenses 120,000 Common expenses 66,000 Total expenses 186,000 Net loss $(17,000) Suppose that department B could increase physical volume of product sold by 10% if it spent an additional $19,500 on advertising while leaving selling prices unchanged. What effect would this have on the department's net income or net loss? (Ignore income tax in your calculations.) Use a negative sign to indicate a net loss answer, otherwise do not use negative signs with your answers. Answer! Sales Answer Cost of goods sold Answer Gross profit Answer Direct expenses 00000 Answer Common expenses Answer Total expenses Answer! Net income (loss)

Answer 1

Solution: There is a net loss of 19600.

Sales Cost of goods sold Gross Profit Direct Expenses Common Expenses Advertisement Total Expenses Net Profit/Loss Original 547000 -378000 169000 - 120000 -66000 10% increase in units sold 601700 -415800 185900 - 120000 -66000 -19500 -205500 -19600 -186000 -17000

Notes:

1. New Sales = Previous sales + 10% of Previous sales = 547000+54700 = 601700.
2. The cost of goods sold is 69.10% of sales (378000/547000). With an increase in units sold, the cost of production will also increase. Therefore New Cost of goods sold is 601700*(378000/547000) = 415800.
3. Direct and common expenses are assumed to be constant (fixed in nature).
4. Advertisement cost is taken as a fixed cost.