In the first year of operations, Naivete Company experienced a $ 500,000 net loss even though it sold 250,000 units. Management was very concerned about this outcome, so it hired an efficiency expert to turn the company’s operations around. The efficiency expert guaranteed the company a profitable second year. The expert stressed, “I agree to work for you for one year at no salary. At the end of the year, if your net income is not at least $ 500,000, you pay me nothing. If your income is $ 500,000 or more, you pay me $ 500,000.”
Naivete’s income statement for the first year of operations is:
In the second year of operations, the same number of units were sold, but the company produced 750,000 units. The selling price and costs remained constant, which resulted in the following income statement:
Explain to the managers of Naivete Company, in detail, what happened to operations in the second year.

  • CreatedMarch 25, 2015
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