The Owner of a Small Retail Business Asks, "Why Do

Essay

The owner of a small retail business asks, "Why do I need cost accountants? My CPA produces financial statements, which are sufficient for me to discover my costs. Look at my Income Statement. I expect sales to increase by 10% next year, so I am planning on a 10% increase in profits. I don't need a cost accountant to tell me that."
$\begin{array}{c}\text { Income Statement for the Year}\\\text { Ending December 31}\\\begin{array}{lr}\text { Sales Revenue }& \$ 457,234 \\\text { Cost of Goods Sold }&296,348 \\ \text { Gross Margin } & 160,886 \\ \text { Selling Costs } & 76,234 \\ \text { Administrative Costs } & 62,350 \\\text { Profit before Taxes }&\$22,302\end{array}\end{array}$
Use your knowledge of the concept of differential costs and explain why a cost accountant would question the conclusion that a 10% increase in sales would yield a 10% increase in profit.