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Analysis

Case 1 showcases the net effect of the decrease in selling prices. There is

an approximate decrease in net income of 50,000 cause by a 10% decrease in

selling prices. This is indicative of the firm’s sensitivity when it comes to its selling

prices.

Case 2 presents the net effect of the increase in select operating

expenses. There is only an approximate decrease of 2,000 caused by the

increase in the operating expenses. This is indicative of the firm’s sensitivity

when it comes to its expenses.

Case 1 and Case 2 bring about a negative effect on the financials of the

business separately so it is with absolute certainty that Case 3, bearing the

changes in Case 1 and Case 2, will have the lowest net income. Of the net

change in net income of 52,000, majority of the change is cause by the changes

in Case 1 – a decrease in the selling prices.

The comparative analysis of the operations of the business shows that the

firm has a higher income when the expenses are raised by 10% than when the

firm’s unit selling price is decreased by the same percentage. This is an

indication that the firm’s selling price has more impact than the operating

expenses. This is an advantage to the company since they cannot control how

much they need to pay annually, and that even if the entity did have control over

the expenses, it would only impact the operations minimally. The selling prices,
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however, are under the control of the company, which is an advantage since, as

shown above, the impact is massive.

For the Returns on Equity (ROE), the researchers have provided the ratios

with 2 decimal places in order to fully express the changes. For the first 3 years

of operations in Case 1 and the original scenario, the ROE is the same since

they will only be incurring expenses in the same amount. As shown in the

Comparative Analyses, Case 2 always has the highest return. This is another

proof of the fact that the Expenses have a far lesser impact on the operations

than the Selling Prices.

The Comparative Analysis of the Breakeven Point in Sales, however,

shows that of the various cases, Case 3 ends up the one with highest Breakeven

Point in Sales. While it may not initially reveal Operating Expenses having a

lesser impact than the Selling Prices, a deeper look into the composition of the

items will prove that a change in Selling Prices has much more impact on the

financials than changes in Operating Expenses.