Question

hau lee furniture inc spends 45% of its sales dollars in the supply chain and finds its current profit of $35000 inadequate. the bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. Hau would like to improve the profit line to $40,000 so he can obtain the bankks approval for the loan. Sales- $100,000 Cost of Materials- $45,000 (45%) Production Costs $15,000 (15%) Fixed Cost $5,000 (5%) Profit $35,000 (35%) What percentage improvement is needed in the supply chain strategy for profit to improve to $40,000? What is the cost of material with a $40,000 profit? A decrease od _____% in material (supply chain) costs is required to yeild a profit of $40,000 for a new material cost of $______ What percentage improvement is needed in the Sales strategy for profit to improve to $40,000? What must sales be for profit to improve to $40,000? An increase of ____% in sales is required to yeild a profit of $40,000 for a new level of sales of $______

Answer 1

To be calculated:

Part-A

(a) Required percentage improvement in supply chain strategy

(b) New cost of material

Part-B

(c) Required percentage improvement in sales strategy

(d) New level of sales

Solution:

(Part-A)

Current profit = $35,000

Desired profit = $40,000

Required increase in profit = Desired profit - Current profit

Required increase in profit = $40,000 - $35,000

Required increase in profit = $5,000

Given the values of other factors remaining the same (unchanged) such as sales, production costs and fixed costs, the change in the cost of materials will be equal to the required increase in the profit to improve to $40,000 from current $35,000.

New Cost of Materials will be calculated as;

New Cost of Materials = Current Cost of Materials - Required Increase in Profit

New Cost of Materials = $45,000 - $5,000

New Cost of Materials = $40,000

The percentage decrease in material costs is calculated as;

Percentage decrease = (New material costs - Old material costs) / Old material costs x 100

Percentage decrease = [($40,000 - $45,000) / $45,000] x 100

Percentage decrease = (- $5,000 / $45,000) x 100

Percentage decrease = - 11.11% (negative sign denotes decrease in costs)

Answer: A decrease of 11.11% in material (supply chain) costs is required to yield a profit of $40,000 for a new material cost of $40,000.

(Part-B)

Current profit = $35,000

Desired profit = $40,000

In the current scenario, Profit = 35% of sales

For a profit of $40,000, let the new sales = x

Therefore,

New Profit = 35% of x = 40,000

x = $114,285.71 or $114,286

New sales = $114,286

New Cost of Materials = $51,429 (45%)

New Production Costs = $17,143 (15%)

New Fixed Costs = $5,714 (5%)

New Profit = $40,000 (35%)

The percentage improvement in the sales strategy is calculated as;

Percentage increase = (New sales - Old sales) / Old sales x 100

Percentage increase = [($114,286 - $100,000) / $100,000] x 100

Percentage increase = ($14,286 / $100,000) x 100

Percentage increase = 14.29%

Answer: An increase of 14.29% in sales is required to yield a profit of $40,000 for a new level of sales of $114,286.