Operations revenue is reduced by $4,343.75
Since the corporation increases its credit by $5,000, it follows that the credit would be increased.
At the conclusion of the accounting period, the corporation prepares the financial statement of profit and loss. It displays the overall earnings for the accounting period as well as the total costs incurred. The difference between the entire revenue and the total expenses is the income from operations.
The following details have been provided for Nutty Productions Inc.
$32,000 is the total revenue for the service.
The operating revenue is $11,000.
Percentage of income from operations to total service revenues
= (income from operations / total service revenues) x 100
= ($11,000 / $32,000) x 100
= 0.34375 x 100
= 34.375%
The current operating income margin is 34.375%.
$63,000 has been added to the revenue as a result of the credit extension.
The increased revenue is computed as follows.
Additional revenue times the percentage of income from operations equals additional revenue earned.
=$63,000 x 34.375%
=$21,656.25
The increased earnings total $21,656.25.
the $26,000 in additional costs that must be paid
Below is a calculation of how much Income from Operations has increased or decreased.
increase/ (decrease) in Income from Operations
= additional income generated - additional expense incurred
=$21,656.25 - $26,000
= ($4,343.75)
The income from operations is down by $4,343.75
The entire income would be if credit were not granted, which would be
= Service revenue + operating income
= $32,000 + $11,000
= $43,000
In the event that credit is granted, the total revenue would be
= Service revenue - Additional costs for wages and bad debts - Income from operations
= $63,000 + $11,000 - $26,000
= $48,000
Since the business offers credit increases by $5,000 then it means that the company will extend its credit.
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COMPLETE QUESTION:
Nutty Productions Inc. generated service revenue of $32,000 and income from operations of $11,000. The company estimates that had it extended credit it would have instead generated $63,000 of service revenue, but it would have incurred $26,000 of additional expenses for wages and bad debts.
1-a. Using these estimates, calculate the amount by which Income from Operations would increase (decrease).
b. should the company extend credit?
