Question

David finds his profit at $8,400, which is inadequate for expanding its business. The bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. He would like to improve its profit line to $18,400 so they can obtain the bank's approval for the loan.

Sales	$280,000
Cost of supply chain purchases	201,600
Other production cost	39,200
Fixed costs	30,800
Profit	8,400

a) Using a supply chain strategy, what is the percentage of change in supply chain purchases to yield a profit of $18,400? What is the new cost of supply chain purchases?

b) Using a sales strategy, what is the percentage of change in supply chain purchases to yield a profit of $18,400? What is the new cost of supply chain purchases?

Answer 1

(a)

As per supply chain strategy, we will look at reducing cost of supply chain purchase to the proportion of increase in profit.

Required increase in Profit = 18400 - 8400 = $10,000

New cost of supply chain purchases = Current cost of supply chain purchases - Required increase in Profit = 201,600 - 10,000 = $191,600

Current percentage of supply chain purchases of Sales = Current cost of supply chain purchases/ Sales = $201,600/ $280,000 = 72%

New percentage of supply chain purchases of Sales= New cost of supply chain purchases/ Sales = $191,600/ $280,000 = 68.43%

Percentage of change in supply chain purchases (of Sales) = 72% - 68.43% = 3.57%

Standalone percentage decrease in supply chain purchases = (201,600- 191,600)/ 201,600 = 4.96%

b)

As per Sales strategy, sales will increase to meet target profit level. Cost of supply chain purchases and other production costs also increase proportionately keeping the percentage of Sales as constant.

Required increase in Profit = 18400 - 8400 = $10,000

To meet this required increase in profit, we will have to increase sales to 351425, cost of supply chain purchases to 253026 and other production cost to 49200 to meet the target profit level as shown in below table.

	Current Situation		Supply Chain Strategy		Sales Strategy
	Value	%	Value	%	Value	%
Sales	$280,000	100%	280000	100%	351425	100%
Cost of supply chain purchases	201,600	72%	191600	68.43%	253026	72%
Other production cost	39,200	14%	39,200	14.00%	49200	14%
Fixed costs	30,800	11%	30,800	11.00%	30,800	8.76%
Profit	8,400	3%	18,400	6.57%	18,400	5.24%

Hence, as per Sales strategy

New cost of supply chain purchases= $253,026

Percentage of change in supply chain purchases (of Sales) = 72%- 72% = 0%

Standalone percentage increase in supply chain purchases = (253,026- 201,600)/ 201600 =25.51%

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