Question

The direct effect of a(n) ___________ in transportation cost is to ______________ ROA.

Answer 1

An increase in transportation costs will typically decrease a company's ROA by raising expenses and reducing profits, while a reduction in such costs can lead to an increase in ROA due to lowered operating costs and potentially higher profits.

Step-by-step explanation:

The direct effect of an increase in transportation cost is to decrease Return on Assets (ROA).

Transportation costs are significant in the operations of any company involved in the production or distribution of goods. When a company faces higher transportation costs, such as those incurred through shipping finished goods across congested street networks and jammed freeways, its expenses rise, which in turn reduces the overall profits and negatively impacts the ROA. Conversely, locations that are near uncrowded freeways or have access to rail or water transport can enhance transportation efficiency and therefore may lead to cost savings.

Consider a messenger company with delivery services in a city. If there is a reduction in transportation costs (for example, a decrease in gasoline prices), the company's operating costs decrease. This will potentially increase profits, allowing the company to expand its delivery area or reduce prices for consumers, leading to a positive effect on ROA.

Answer 2

An increase in transportation costs leads to a decrease in ROA, as higher costs cut into profits. Conversely, a decrease in transportation costs can improve ROA by enabling companies to expand services and increase profitability without raising prices.

Step-by-step explanation:

The direct effect of an increase in transportation cost is to decrease Return on Assets (ROA). An increase in transportation expenses, such as shipping finished goods over congested street networks or jammed freeways, elevates costs and diminishes profits. In contrast, locations near uncrowded freeways that facilitate access to materials and workers, or close to rail or water transport options, can enhance cost-effectiveness.

To understand the impact on ROA, consider a messenger company whose significant expenditure is on gasoline. If gasoline prices drop, the company's costs decrease, which in turn could boost profits and expand the range of services provided without raising prices. The correlation between transportation costs and ROA is therefore inverse; as the former declines, the latter generally improves, assuming all other factors remain consistent.