Which of the following decrease the change in profit on a partial budget? a. Additional costs and additional revenue b. Reduced costs and reduced revenue c. Additional costs and reduced revenue d. Reduced costs and additional revenue
The correct answer and explanation is:
The correct answer is d. Reduced costs and additional revenue.
A partial budget is a tool used to assess the financial impact of a change in a business or farm operation. It focuses on the specific changes in costs and revenues that result from the proposed change, rather than looking at the entire operation. When analyzing the effect of changes on profit, the key factors are the differences in costs and revenues associated with the new decision or change.
Reduced costs and additional revenue help to decrease the negative impact on profit. Here’s why:
- Reduced costs: When costs decrease, the business or operation spends less on expenses, which directly increases profit. A reduction in input costs, labor costs, or overhead can lower the total expenditure required to run the operation, thus improving the financial outcome.
- Additional revenue: When revenue increases, it adds directly to the income generated from the business. Additional revenue could come from higher sales, increased prices, or expanding into new markets. This extra income helps to boost profit, counteracting any cost increases that might arise from the change.
When both costs are reduced and revenue is increased, it creates a situation where the overall impact on the operation’s financial performance is more favorable, leading to an increase in profits. Therefore, these factors work together to decrease the change in profit by improving the financial stability of the business.
In contrast, options like a. Additional costs and additional revenue or b. Reduced costs and reduced revenue either lead to an increase in costs without sufficient revenue to offset it, or a decrease in both costs and revenue, which can result in a decrease in profits. Therefore, d. Reduced costs and additional revenue is the best answer as it maximizes profitability.