Final Answer:
When companies incur selling and administrative costs, those costs decrease the company's profit.
Thus option 2 is correct.
Step-by-step explanation:
Selling and administrative costs directly impact a company's bottom line. These expenses, encompassing advertising, salaries, utilities, etc., reduce the overall profit. For instance, when calculating net income, these costs are subtracted from the gross income. Mathematically, Profit = Revenue - Cost, and when selling and administrative costs increase, they reduce the overall profit. Therefore, these costs play a pivotal role in diminishing the company's profitability.
Selling and administrative costs are part of the operating expenses that affect the income statement. These expenses lower the net income figure and, in turn, the retained earnings, affecting the company's overall financial health. For example, if a company incurs $50,000 in selling and administrative costs and has a gross income of $200,000, the net income would be $150,000 ($200,000 - $50,000), showcasing the direct impact of these costs on the profit.
Moreover, these expenses are crucial in determining a company's efficiency and management effectiveness. High selling and administrative costs relative to revenue could indicate inefficiencies, leading to lower profits. Understanding and managing these costs are critical for companies to maintain a healthy bottom line and sustainable operations.
Therefore option 2 is correct.