Question

​_______________ holds that​ $1 in cost savings increases pretax profits by​ $1, while a​ $1 increase in sales increases pretax profits by only​ $1 multiplied by the pretax profit margin.

Answer 1

Answer:

Profit leverage effect. The explanation of this question is given below in explanation section.

Explanation:

Profit leverage effect holds that​ $1 in cost savings increases pretax profits by​ $1, while a​ $1 increase in sales increases pretax profits by only​ $1 multiplied by the pretax profit margin.

The profit leverage effect is about reducing operating expenses that is more efficient than increasing sales. It is situated at the start of the production process of a service or product, the procurement stage is in an excellent position to reduce overall costs, especially in the short term. This is why companies often resort to reducing headcount when they run into financial difficulties. Reducing operating costs is the fastest way to produce a short-term impact on the bottom line. A dollar saved in purchasing almost always has a greater impact on profit than a dollar increase in sales. However, it is remember that, only a small portion of each sales dollar makes it to the bottom line. The rest is spent on the costs of doing business—e.g., cost of administrative, goods sold, logistics, and marketing costs. These costs must be deducted from each sales dollar to determine its contribution to operating profit (it is also known as, earnings before interest and taxes). By contrast, every dollar you save through purchasing goes straight to operating profit.