In the context of net sales, a 10 percent merit pay increase budget indicates which of the following?

• A. The company plans to increase employee salaries by 10% based on performance, which may impact operating expenses but does not directly affect net sales.
• B. Gross sales will decrease by 10% due to higher payroll costs.
• C. Net sales will automatically increase by 10% as a result of the merit pay increase.
• D. The company will reduce its sales returns and allowances by 10%.

Answer: (A)

Verified step by step guidance

1. Understand the concept of net sales: Net sales are calculated as gross sales minus sales returns, allowances, and discounts. It represents the revenue generated from sales after accounting for these deductions.
2. Analyze the impact of a merit pay increase: A merit pay increase refers to a rise in employee salaries based on performance. This affects operating expenses, not net sales directly.
3. Clarify the relationship between payroll costs and sales: Higher payroll costs due to merit pay increases are part of operating expenses and do not directly reduce gross sales or net sales.
4. Evaluate the incorrect options: Gross sales will not decrease due to payroll costs, as payroll is not part of sales calculations. Net sales will not automatically increase due to merit pay, as net sales are tied to revenue, not expenses. Sales returns and allowances are unrelated to merit pay increases.
5. Conclude the correct interpretation: The merit pay increase impacts operating expenses but does not directly affect net sales, gross sales, or sales returns and allowances.