Multiple Choice
Which of the following documents tells you what your gross and net income was for a particular pay period?
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4. Merchandising Operations
Net Sales
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When analyzing net sales and seeking ways to improve profitability, which area of expenses is typically most effective to target for cost reduction?
A
Income Tax Expense
B
Interest Expense
C
Cost of Goods Sold (COGS)
D
Selling, General, and Administrative Expenses (SG&A)
Verified step by step guidance1
Understand the components of net sales: Net sales represent the revenue generated from selling goods or services, minus returns, allowances, and discounts.
Recognize the relationship between expenses and profitability: Profitability is influenced by reducing expenses while maintaining or increasing net sales.
Analyze the expense categories: Common expense categories include Cost of Goods Sold (COGS), Selling, General, and Administrative Expenses (SG&A), Interest Expense, and Income Tax Expense.
Evaluate the impact of SG&A expenses: SG&A expenses typically include costs related to marketing, salaries, office supplies, and administrative functions. These are often discretionary and can be adjusted without directly affecting production or sales volume.
Conclude why SG&A is effective for cost reduction: Targeting SG&A expenses for reduction is often more feasible and impactful for improving profitability compared to fixed costs like Interest Expense or Income Tax Expense, or variable costs like COGS.
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