Asked by Tabitha Mooney on May 16, 2024
Verified
Holding all other variables constant, an increase in COGS will lead to:
A) a decreased cost ratio.
B) a higher gross margin.
C) lower net income.
D) paying more in taxes.
COGS
Cost of Goods Sold (COGS) refers to the direct costs associated with the production of goods sold by a company, including material and labor costs.
Gross Margin
Revenue less cost where cost is spending closely associated with production. Stated in dollars or as a percent of revenue. A fundamental measure of a business’s strength.
Net Income
The total profit of a company after all expenses and taxes have been deducted from revenues.
- Analyze the impact of changes in COGS and other variables on net income and taxes.
Verified Answer
FC
Fatima CentenoMay 18, 2024
Final Answer :
C
Explanation :
COGS (Cost of Goods Sold) is a direct expense that is deducted from revenue to calculate gross profit. If COGS increases, the gross profit decreases. As a result, net income will decrease as well. Option A is incorrect because the cost ratio is calculated by dividing total costs by revenue, so an increase in COGS would actually increase the cost ratio. Option B is incorrect because an increase in COGS would decrease the gross margin, not increase it. Option D is incorrect because taxes are based on taxable income, which is calculated after deducting expenses including COGS, so an increase in COGS may actually decrease the amount of tax paid.
Learning Objectives
- Analyze the impact of changes in COGS and other variables on net income and taxes.