The Owner of a Small Retail Business Asks, "Why Do

question 65

Essay

The owner of a small retail business asks, "Why do I need cost accountants? My CPA produces financial statements, which are sufficient for me to discover my costs. Look at my Income Statement. I expect sales to increase by 10% next year, so I am planning on a 10% increase in profits. I don't need a cost accountant to tell me that."
$\begin{array}{c}\text { Income Statement for the Year}\\\text { Ending December 31}\\\begin{array}{lr}\text { Sales Revenue }& \$ 457,234 \\\text { Cost of Goods Sold }&296,348 \\ \text { Gross Margin } & 160,886 \\ \text { Selling Costs } & 76,234 \\ \text { Administrative Costs } & 62,350 \\\text { Profit before Taxes }&\$22,302\end{array}\end{array}$
Use your knowledge of the concept of differential costs and explain why a cost accountant would question the conclusion that a 10% increase in sales would yield a 10% increase in profit.

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Definitions:

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of the good that suppliers are willing to produce and sell.

Upsloping

A description for a curve or a line on a graph that shows a positive relationship between two variables, indicating that as one variable increases, the other also increases.

Quantity Supplied

The total amount of a good or service that producers are willing and able to sell at a given price over a specified period.

Price

is the amount of money expected, required, or given in payment for something, reflecting the value that must be exchanged to obtain a good or service.