Module 1 Activity 1: COGS vs.

Sales

The COGS vs. Sales activity compares the impact of reducing the cost of goods sold (COGS)
to a similar increase in sales revenues and, from there, you will find out on your own just how
much of a revenue increase is the equivalent of a similar reduction in product costs. After
performing this activity, you should be more familiar with the interconnected nature of the
financial statements and should also understand the impact that cost savings can have on your
organization's finances.

Download the following Excel spreadsheet for this activity: apics_financial_statements.xls

The following steps will lead you through the activity:

1. Open the spreadsheet and save a copy under a different file name. That way you can
revert back to the original copy if necessary. The original copy can also be used as a
point of reference to see the differences your changes made.
2. Familiarize yourself with the tabs of the spreadsheet (at the bottom of the window). The
tabs are Instructions, Assumptions, Income Statement, Balance Sheet, and Cash Flows.
You may need to use the arrows to the left of these tabs to see some of the tabs.
3. Click on the Instructions tab.
4. Read the instructions and note the blue fields on other tabs. This spreadsheet allows you
to change the parameters in these fields, and the changes are reflected on the
spreadsheet as soon as you enter a new value and press enter.
NOTE: You can change any other field as well, but some changes could result in the
statements no longer functioning correctly. You can click Undo Typing (Ctrl + Z) at any
time to remove any changes.
5. Click on the Income Statement tab. The current amounts for Years 1 through 3 for NET
SALES, COGS, and AFTER-TAX INCOME should be as follows (all amounts in
thousands (000)):

6. In the blue input field for COGS (cell B8), enter 52% as the new value (a 4% reduction in
COGS for each year). Note the new values for the same fields as in the last step: NET
SALES, COGS, and AFTER-TAX INCOME.
7. Answer Question 1 below. Then continue on with the next step in this exercise.
8. Change the blue input field for COGS back to 56% (or click on Undo Typing (CTRL + Z)).
9. Now increase SALES-GROSS by 4% for each of the years (NET SALES will
automatically also increase by 4%) by entering the following new SALES-GROSS
amounts in cells D4, E4 and F4 respectively:

10. Answer Questions 2 through 5 below.

Question 1 of 5:

Which of the following correctly lists the change in AFTER-TAX INCOME caused by this 4%
reduction in COGS?
a) Year 1 = $62 increase, Year 2 = $75 increase, Year 3 = $82 increase
b) Year 1 = $62 decrease, Year 2 = $75 decrease, Year 3 = $82 decrease
c) Year 1 = $68 increase, Year 2 = $73 increase, Year 3 = $62 increase
d) Year 1 = $68 decrease, Year 2 = $73 decrease, Year 3 = $62 decrease

Question 2 of 5:

Which of the following correctly lists the new amounts for COGS and AFTER-TAX INCOME for
each year?

Question 3 of 5:

Why did this change result in an increase in COGS?

a) Selling more units requires more direct materials, direct labor, and overhead.
b) Selling more units requires more marketing and advertising expenses.
c) Selling more units requires more direct materials and direct labor, but overhead is fixed and
does not increase.
d) Selling more units requires more selling and general and administrative expenses.
Question 4 of 5:

Referring to the original AFTER-TAX INCOME shown here, which of the following correctly lists
the change in AFTER-TAX INCOME caused by this 4% increase in net sales?

a) Year 1 = $14 increase, Year 2 = $17 increase, Year 3 = $19 increase

b) Year 1 = $16 increase, Year 2 = $25 increase, Year 3 = $23 increase
c) Year 1 = $37 increase, Year 2 = $43 increase, Year 3 = $33 increase
d) Year 1 = $62 increase, Year 2 = $75 increase, Year 3 = $54 increase

Question 5 of 5:

Which of the following is the amount of increase in NET SALES that would be needed to match
or exceed the increase in after-tax income provided by the 4% reduction in COGS?

Note: To find the correct answer, continue increasing the SALES-GROSS amounts until the
results match or exceed the amounts for AFTER-TAX INCOME achieved by reducing COGS
by 4%. The table below provides the original numbers for SALES-GROSS. Multiply these
amounts by increasing percentages (e.g., multiplying $2,373 by 1.15 would increase the
number by 15%). Enter the increased amounts for each year in the SALES-GROSS fields (D4,
E4, and F4) and if they are insufficient, start over with a larger percentage.

a) 8%
b) 14%
c) 18%
d) 21%