When evaluating cost-cutting proposals, which of the following is the most appropriate measure to use for assessing the impact on a company's net sales?

• A. Operating expenses, as they directly represent the cost-cutting measures
• B. Gross sales, since it includes all sales before any deductions
• C. Net income, because it shows the company's overall profitability
• D. Net sales, as it reflects total revenue after deducting returns, allowances, and discounts

Answer: (D)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the total revenue generated by a company after deducting returns, allowances, and discounts. It is a key metric for evaluating the effectiveness of cost-cutting proposals as it directly reflects the revenue impact.
2. Analyze why operating expenses are not the most appropriate measure: Operating expenses represent the costs incurred during normal business operations. While they are relevant for cost-cutting, they do not directly measure the impact on revenue or sales.
3. Evaluate gross sales: Gross sales include all sales before any deductions such as returns, allowances, and discounts. It does not provide a clear picture of the actual revenue retained by the company, making it less suitable for assessing cost-cutting impacts.
4. Consider net income: Net income reflects the company's overall profitability after accounting for all expenses, taxes, and other deductions. While it is important for financial analysis, it does not isolate the impact on sales revenue specifically.
5. Conclude why net sales is the correct measure: Net sales is the most appropriate metric for assessing the impact of cost-cutting proposals on a company's revenue because it accounts for deductions that directly affect the revenue retained by the company.