Question

The following are the income statements of the Hancock Company for two consecutive years. Increases in which expenses contributed to the net loss in 2016? 2016 2015 Revenue $ 30,000 $ 20,000 Cost of goods sold 17,800 12,000 Gross margin 12,200 8,000 Operating expenses Selling expenses 4,800 4,600 Administrative expenses 7,800 3,000 Total operating expenses 12,600 7,600 Net income $ (400) $ 400

Answer 1

Answer:

Increase in Administrative Expense of $3,300 additional led to loss in the year 2016.

Explanation:

As for the provided details:

Particulars                2016             2015

Revenue                 $30,000         $20,000

Cost of goods sold  $17,800        $12,000

Gross margin          $12,200         $8,000

Operating Exp        

Selling Exp             $4,800            $4,600

Admin. Exp             $7,800            $3,000

Total operating exp $12,600         $7,600

Net Income              ($400)            $400

As we see the major difference which is irrelevant is in administration expense, that is because difference in cost of goods sold is somewhere justified as, when it calculated as a percentage of sale that is $12,000/$20,000 = 60%

Thus for year 2016 also the expense shall be $30,000 $\times$ 60% = $18,000

Thus, it is justified but for administrative expense $3,000/$20,000 = 15%

For 2016 = $30,000 $\times$ 15% = $4,500

But since it is very much exaggerated, by $7,800 - $4,500 = $3,300 this is the main reason of loss.