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Problem 1

# Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income?

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Better decisions in purchasing and managing goods often result in dramatic percentage increases in net income because they reduce the cost of goods sold (COGS). A reduced COGS leads to a higher gross profit and, consequently, a higher net income, given that expenses and taxes remain constant. For instance, if better decisions lead to a 10% reduction in COGS, the gross profit increases, and the net income can potentially increase by 140%, underscoring the importance of improving these aspects of a business.
See the step by step solution

## Step 1: Understand the terminologies

Before diving into the calculations, we should understand the key terms like cost of goods sold (COGS), gross profit, and net income. COGS: This is the cost of producing or purchasing the goods that are sold during a specific period. Reducing the cost of goods sold will have a direct impact on the gross profit. Gross Profit: This is the difference between revenue (total sales) and the COGS. Gross profit measures how effectively a company generates profit from direct labor and direct materials. Net Income: This is the total profit remaining after deducting all expenses, taxes, and costs from the gross profit. The net income indicates a company's profitability and is an important measure for businesses to track over time.

## Step 2: Establish the relationship between terminologies

There is a clear relationship between COGS, gross profit, and net income. As we reduce COGS, the gross profit will increase, and consequently, the net income will also increase. The formula to calculate net income can be given as: Net Income = Gross Profit - (Expenses + Taxes)

## Step 3: See the impact of better decisions on net income

When a business makes better purchasing and managing decisions, the COGS will likely decrease. A reduced COGS will lead to a higher gross profit. If the expenses and tax amounts remain the same, then the net income will naturally increase. For example, let's assume a company has the following financial figures: Revenue: $1,000,000 COGS:$700,000 Expenses: $200,000 Taxes:$50,000 Step 1: Calculate the Gross Profit Gross Profit = Revenue - COGS Gross Profit = $$1,000,000 -$$700,000 Gross Profit = $300,000 Step 2: Calculate the Net Income Net Income = Gross Profit - (Expenses + Taxes) Net Income = $$300,000 - ($$200,000 +$50,000) Net Income = $50,000 Now let's assume that better decisions reduce the COGS by 10%, which is$70,000: New COGS = $$700,000 -$$70,000 New COGS = $630,000 Step 3: Calculate the new Gross Profit New Gross Profit = Revenue - New COGS New Gross Profit = $$1,000,000 -$$630,000 New Gross Profit =$370,000 Step 4: Calculate the new Net Income New Net Income = New Gross Profit - (Expenses + Taxes) New Net Income = $$370,000 - ($$200,000 + $50,000) New Net Income =$120,000 Step 5: Calculate the percentage increase in Net Income Percentage Increase = (New Net Income - Old Net Income) / Old Net Income * 100 Percentage Increase = ($$120,000 -$$50,000) / \$50,000 * 100 Percentage Increase = 140% So, better decisions regarding purchasing and managing goods have caused a dramatic 140% increase in net income, highlighting the importance of improving these aspects of a business.

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