Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income?

Answer:

Increase in net income can be achieved by :-

1. Reduction in cost

2. Increase in sale revenue and other income

One of the item of cost is purchase and maintenance of inventory . If we manage the inventory efficiently and effectively then it is possible for the organization to increase it's net income.

A) Cost of good sold or direct material cost

B) Ordering Cost & carrying cost

C) Cost of quality

Are among those cost that if we manage these cost in our retail and manufacturing concern we should definitely increase our net income .

Cost of good sold or direct materials costs as a percentage of sales frequently exceed net income as a percentage of sales frequently exceed net income as a percentage of sales by many magnitude.suppose we have cost of good sold is $200000 and sale is $ 400000 keeping other factors constant. and by improving in ordering cost and cost of quality & by carrying cost we improve our cost of good sold now turns out to be $100000 so you can see previously we have net income perecentage of net sale is 50% i.e (200000/400000*100) but due to reduction in cost of good sold .net income turns out to be 400000-100000= $300000

So net income increase as a percentage of sales to (300000/400000*100) i.e 75%

So it has dramatic change of 25% in net income just due to better decisions in cost of good sold and by improving cost of quality.