Final answer:
The correct option is A). Spending an additional $40,000 on security guard services and reducing inventory losses by $5,000 per annum would result in an increase in net profit over time, as the benefit of reducing inventory loss accumulates annually and potentially offsets the initial security expense.
Step-by-step explanation:
The student's question pertains to how expense control and a decrease in inventory loss affect net profit. Specifically, the question asks whether spending an additional $40,000 on a security guard and reducing inventory loss by $5,000 per annum would lead to an increase or decrease in net profit.
Let's analyze the given information. If a company spends an additional $40,000 on security, this is an increase in expenses. However, if this action results in a reduction in inventory loss by $5,000 annually, there is a benefit as well. The question is whether the benefit outweighs the cost.
To determine the net profit impact, subtract the total expenses from the total revenues. The expense increase for the security guard reduces profit by $40,000, while the reduction in inventory loss increases profit by $5,000 annually. Over time, if the security guard expense is a one-time or fixed annual cost, the benefit of inventory loss reduction accumulates annually, potentially justifying the initial expense.
Therefore, the answer is A: Net profit increases; both actions are beneficial—assuming the reduction in inventory loss continues over multiple years, offsetting the initial cost of improved security.