Will a 15 percent change in sales will result in a 15 percent change in net income?

Answer 1

The only situation where this could occur if you had no overhead. Overhead expenses are the expenses just for the business to stay open: like rent, electricity, telephone, insurance, for example. Overhead expenses are relatively fixed in relation to sales level, for small changes in sales (like 15%). With large enough increases, you might have to move into a bigger space, and pay more rent or hire additional staff, for example.

So assume that a business does have overhead, and for simplicity let's say it is a consultant (1 person) who does not sell any materials, which have to be marked up.

Say the overhead is $1000 per month, and sales are $3000 per month for a net profit of $2000 per month. Now increase sales by 15% : $3450 sales per month, less $1000 overhead is $2450 per month. The increase is $450, and percentage change in net profit is 450/2000 = 22.5% increase.

Another example: Say you're a 1 person business with the same $1000/month overhead, but you sell items. Say you double whatever your cost is (if you buy something for $50, then you sell it for $100). Now with the same $3000/month sales, you paid $1500 for the items that you sold + the $1000 overhead = $2500 total costs. So net profit is $500 for the month. With the same 15% increase: $3450 in sales means you spent $1725 for the items + $1000 overhead = $2725. Net profit is now $3450 - $2725 = $725. The profit increase is $725 - $500 = $225, and the percentage profit increase is 225/500 = 45% increase.