In budgeting, if revenues increase by 3% and total expenses increase by 2.5%, budgeted profit will generally:

• A. Decreases
• B. Remains the same
• C. Increases
• D. Cannot be determined

Answer: (C)

Profit is what’s left after subtracting expenses from revenue. When both sides grow, the impact on profit depends on which grows faster in percentage terms. Here revenues rise by 3% and expenses rise by 2.5%. That extra 0.5 percentage point in revenue growth adds more to the top line than the extra 0.5 percentage point added to costs subtracts from the bottom line, so the overall profit tends to rise.

You can see this with a simple check: suppose baseline revenue is 100 and expenses are 80. New revenue becomes 103, new expenses become 82. Profit goes from 20 to 21, an increase. So budgeted profit increases.