A retailer with sales of $1 million wants to increase its efficiency rating from 40 percent to 60 percent.To what must it reduce operating expenses?

Question

Quizplus · Accepted Answer

To increase efficiency rating from 40% to 60%, the retailer needs to reduce its operating expenses to 40% of its current level (100% - 60% = 40%).

Operating expenses before reduction = Sales x Operating expense ratio
= $1 million x 40% 
= $400,000

To reduce operating expenses to 40% of $400,000:

Operating expenses after reduction = $400,000 x 40% 
= $160,000

Therefore, the retailer must reduce operating expenses by $400,000 - $160,000 = $240,000.

The closest answer choice is B ($400,000).

A Retailer with Sales of $1 Million Wants to Increase