What percentage reduction in operating expenses equates to the same impact as a 30% increase in sales?

What percentage reduction in operating expenses equates to the same impact as a 30% increase in sales?

• A. 2%
• B. 5%
• C. 10%
• D. 15%

Answer: (B)

To determine the percentage reduction in operating expenses needed to equate the financial impact of a 30% increase in sales, it is essential to understand the relationship between sales, expenses, and profit. When sales increase by 30%, it typically results in a proportional increase in profit, assuming expenses remain constant. Conversely, if a business reduces its operating expenses, it increases its profit margins. The goal is to find how much operating expenses must decrease to achieve the same increase in profit that a 30% increase in sales would provide. To make this clearer, let’s consider a simplified example. Assume a company has sales of $100 and operating expenses of $70, yielding a profit of $30. If sales increase by 30%, new sales would be $130. Assuming expenses remain $70, the new profit would be $60. Thus, the increase in profit is $30. Now, to measure the effect of reducing expenses, if we reduce operating expenses by a certain percentage, say 5%, the new operating expenses would be $66.5. This would yield a new profit of $63.5. The difference in profit before and after the expense reduction is also $30. Through calculating different percentages for expense reductions, it

To determine the percentage reduction in operating expenses needed to equate the financial impact of a 30% increase in sales, it is essential to understand the relationship between sales, expenses, and profit.

When sales increase by 30%, it typically results in a proportional increase in profit, assuming expenses remain constant. Conversely, if a business reduces its operating expenses, it increases its profit margins. The goal is to find how much operating expenses must decrease to achieve the same increase in profit that a 30% increase in sales would provide.

To make this clearer, let’s consider a simplified example. Assume a company has sales of $100 and operating expenses of $70, yielding a profit of $30. If sales increase by 30%, new sales would be $130. Assuming expenses remain $70, the new profit would be $60. Thus, the increase in profit is $30.

Now, to measure the effect of reducing expenses, if we reduce operating expenses by a certain percentage, say 5%, the new operating expenses would be $66.5. This would yield a new profit of $63.5. The difference in profit before and after the expense reduction is also $30.

Through calculating different percentages for expense reductions, it