Question

Brandywine Clinic, a not-for-profit business, had revenues of $10.7 million last year. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $2.1 million. All revenues were collected in cash during the year, and all expenses other than depreciation were paid in cash. Now, suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense was halved. How would this change affect Brandywine's net income

Answer 1

net income will increase by $1,050,000

Step-by-step explanation:

current net income = ($10.7 million x 25%) - $2.1 million = $575,000

if depreciation expense is cut by half, then new net income will be:

new net income = ($10.7 million x 25%) - $1.05 million = $1,625,000

this means that net income will increase by $1,625,000 - $575,000 = $1,050,000