Jennings, Jenkins, and Isaiah reported the following sales information for the last four years. Management has been happy with the sales growth. However, the new controller is concerned that sales have not been keeping pace with inflation. Given the following information, is the controller right to be concerned and why?
20X4 | 20X3 | 20X2 | 20X1 | |
---|---|---|---|---|
Sales | $148,764 | $135,240 | $117,600 | $98,000 |
Inflation Rate | 12% | 9% | 5% |
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Flashcards
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A. No, average growth has been $16,921 per year. | ||
B. Yes, while still positive, sales growth rate has been slowing down. | ||
C. Yes, sales growth in 20X4 was only 10% while inflation was 12%. | ||
D. No, total sales are increasing each year. |
(Choice A) This answer is incorrect. Basing the decision on average growth looks at actual sales growth rather than real sales growth. The effects of inflation have been ignored.
(Choice B) This answer is incorrect. While this is a true statement, the effects of inflation have not been evaluated. Real sales growth results from sales that increase more rapidly than inflation.
(Choice C) This answer is correct. Sales growth % = (Current year sales − Prior year sales) ÷ Prior year sales = ($148,764 − $135,240) ÷ $135,240 = 10%. Since inflation was 12% for that year, either sales prices did not keep up with inflation rates or the units sold for the year decreased. Either way, Jennings, Jenkins, and Isaiah needs to make some changes to remain profitable.
(Choice D) This answer is incorrect. Basing the decision on the current dollar sales ignores the effects of inflation.