Christy Burch and Myung Lim, partners, compared their current income statement with their income statement of a year ago. They noted that sales were 12.0% higher than a year ago. They also noted that the total expenses were 20.0% higher than a year ago. What type of analysis should be done to determine whether the increase in expenses is justified? Explain your answer

To determine whether the increase in expenses is justified, a comparative analysis should be conducted. This analysis involves comparing the income statements from the current year and the previous year to identify the reasons behind the increase in expenses.

The first step is to calculate the dollar amount of the increase in expenses by subtracting the total expenses from a year ago from the total expenses in the current year. Once the dollar amount is determined, it can be expressed as a percentage of the expenses from the previous year.

For example, if the total expenses a year ago were $100,000 and the current year's expenses are $120,000, the dollar amount of the increase in expenses would be $20,000. To express this increase as a percentage, divide the dollar amount of the increase by the total expenses from a year ago and multiply by 100. In this case, the percentage increase would be 20% ($20,000 divided by $100,000, multiplied by 100).

Next, compare the percentage increase in expenses with the percentage increase in sales. In this case, the partners noted that sales were 12% higher than a year ago. By comparing the increase in expenses (20%) with the increase in sales (12%), the partners can determine if the increased expenses are proportionate to the increase in sales.

If the percentage increase in expenses is greater than the percentage increase in sales, it may suggest that the increase in expenses is not justified and requires further examination. It could indicate inefficiencies, overspending, or other issues that need to be addressed. Conversely, if the percentage increase in expenses is relatively close or lower than the percentage increase in sales, it may suggest that the expenses are justified based on the growth of the business.

In summary, a comparative analysis, involving calculating the percentage increase in expenses and comparing it to the percentage increase in sales, should be done to determine whether the increase in expenses is justified.