Question

Soylent Corp sells $150,000 of energy drinks with a cost of materials at $90,000 and a cost of production at $22,500. Fixed operating costs are $20,000.
a)Determine current profit.

b)If Soylent Corp uses the Sales Strategy to increase sales to $250,000, its fixed costs will increase by $10,000. Determine the new profit. Profits increased by what percent?

c) If Soylent Corp uses the Supplier Strategy to decrease material costs in order to double profits determine the new material cost. Materials would now be what percent of sales?

Answer 1

Solution: Soylent Corp

1)

a) Total Sales = $1,50,000

b) Cost of materials = $90,000

c) Cost of Production = $22,500

d) Fixed Operating Costs = $20,000

e) Current Profit {a - (b+c+d)} = Sales - Total Costs = 1,50,000 - (90,000+22,500+20,000) = $17,500

Current Profit is $17,500

2) For new sales = $2,50,000 (Since no data is given on material cost and production cost, it is assumed to be constant)

f) Incremental sales = 250000 - 150000 = $1,00,000

g) Incremental fixed cost = $10,000

h) New Profit {e+f-g} = Current Profit + Incremental Sales - Incremental Cost = 17500 +100000- 10000 = $1,07,500

i) Percentage increase in profit {(h - e)/e*100} = (107500-17500)/17500 *100 = 514%

Alternatively,

For new sales = $2,50,000 (We can assume material cost and production cost have increased proportionately)

New Sales = $2,50,000

New Cost of materials = 2,50,000*90,000/150,000 = $1,50,000

New Cost of Production = 2,50,000*22,500/150,000 = $37500

New Fixed Operating Costs = $20,000 + 10000 = $30,000

New Current Profit = Sales - Total Costs = 2,50,000 - (1,50,000+37,500+30,000) = $32,500

Percentage increase in profit = (32500-17500)/17500 *100 = 85.7%

3) Since, it is not mentioned if Supplier Strategy is applied on the base case or post applying sales strategy, we are assuming its application on the base case.

Initially Profit (from e) = $17,500

By application of supplier strategy, a decrease in material cost has led to doubling of profit.

Therefore, decrease in material cost = $ 17,500

New material cost = 90,000 - 17500 = $72,500

New Profit = 2*17,500 = $35,000

New Sales = 1,50,000 + 17500 = 1,67,500

New material cost as percentage of new sales = 72500 / 167500 *100 = 43.28%