CMA Study Group

A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?
a. Gross profit will increase by 8.0%.
b. Operating income will increase by 8.7%.
c. Operating income will increase by $200,000.
d. Operating expenses will be reduced by $300,000.

Answer is C ( Can any one explain Please )

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Ahmed Kishka
Supervisor
Mansoura
Egypt
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Gross margin is 25% and operting income is 15%, therefore operating expenses are 10%. These are forceast to drop by 20%.

With Operating expense at 1000000, the forecast drop at 20% is 200000. Income tax rate of 35% remains, simply a fact (to fill at the question)

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Clifford Moggs CMA
Other
Reading
United Kingdom
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Original Message:
Sent: 05-20-2017 02:56 AM
From: Ahmed Kishka
Subject: Operation Incom

A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?
a. Gross profit will increase by 8.0%.
b. Operating income will increase by 8.7%.
c. Operating income will increase by $200,000.
d. Operating expenses will be reduced by $300,000.

Answer is C ( Can any one explain Please )

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Ahmed Kishka
Supervisor
Mansoura
Egypt
------------------------------

Dear Ahmed,

Gross Profit - Operating Expenses = Operating Income 

In this example, Gross profit is 25,00,000 (25%) and Operating Income is 15,00,000 (15%) which means our operating expenses were 10,00,000. If you decrease operating expenses by 20%, it means your profit will rise with the same amount. 

I hope you understand the concept.

Thanks,

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Tanveer Ashraf
General Accountant
Dubai
United Arab Emirates
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Original Message:
Sent: 05-20-2017 02:56 AM
From: Ahmed Kishka
Subject: Operation Incom

A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?
a. Gross profit will increase by 8.0%.
b. Operating income will increase by 8.7%.
c. Operating income will increase by $200,000.
d. Operating expenses will be reduced by $300,000.

Answer is C ( Can any one explain Please )

------------------------------
Ahmed Kishka
Supervisor
Mansoura
Egypt
------------------------------

Original Message------

Dear Ahmed,

Gross Profit - Operating Expenses = Operating Income 

In this example, Gross profit is 25,00,000 (25%) and Operating Income is 15,00,000 (15%) which means our operating expenses were 10,00,000. If you decrease operating expenses by 20%, it means your profit will rise with the same amount. 

I hope you understand the concept.

Thanks,

------------------------------
Tanveer Ashraf
General Accountant
Dubai
United Arab Emirates
------------------------------