Question

SM.65 A marketing company prides itself on its sales prowess and is looking for ways to increase profits. Given the company culture, the president calls for a 13% increase in sales to meet the profitability goals. The company currently has revenues of $12,263,000 (annually), spends 56% of its revenues on purchases, and has a net profit margin of 5.75%.

You are a modest purchasing intern working for this company and you want to show the president that it may be easier to reach the profitability goals by lowering the purchasing expenses (while holding sales constant, that is, no need to increase sales by 13%).

If the company is able to reach its goal of increasing sales by 13%, by how how many dollars would its revenue increase? (Display your answer as a whole number.)

   

If the company is able to reach its goal of increasing sales by 13%, by how many dollars would its profit increase? (Display your answer as a whole number.)

   

Assuming that revenues stayed flat (meaning the company did not try to increase sales by the 13 percent target), by what percentage would they have to decrease purchasing expenses to equal the increased profit that would have come from a 13 percent increase to revenues? (Write your answer as a percentage, and display your answer to two decimal places.)
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Answer 1

Q 1. If the company is able to reach its goal of increasing sales by 13%, by how how many dollars would its revenue increase? (Display your answer as a whole number.)

Ans 1.

A - Current Revenue = $12,263,000

B - Increase in Sales = 13%

C - New Revenue = A + A*B =  $12,263,000 + $12,263,000 * 13% = $ 13,857,190

D - Icrease in Revenue = C - A = $ 13,857,190 - $12,263,000 = $ 1,594,190

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Q 2. If the company is able to reach its goal of increasing sales by 13%, by how many dollars would its profit increase? (Display your answer as a whole number.)

Ans 2.

A - Current Revenue = $12,263,000

B - Increase in Sales = 13%

C - New Revenue = A + A*B =  $12,263,000 + $12,263,000 * 13% = $ 13,857,190

D - Profit % = 5.75%

E - Profit on Current Revenue = A * D = $12,263,000 * 5.75% = $ 705,123

F - Profit on New Revenue = C * D = $ 13,857,190 * 5.75% = $ 796,788

G - Increase in Profit = F - E = $ 796,788 - $ 705,123 = $ 91,666

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Q 3. Assuming that revenues stayed flat (meaning the company did not try to increase sales by the 13 percent target), by what percentage would they have to decrease purchasing expenses to equal the increased profit that would have come from a 13 percent increase to revenues? (Write your answer as a percentage, and display your answer to two decimal places.)

A - Current Revenue = $12,263,000

B - Increase in Sales = 13%

C - New Revenue = A + A*B =  $12,263,000 + $12,263,000 * 13% = $ 13,857,190

D - Profit % = 5.75%

E - Profit on Current Revenue = A * D = $12,263,000 * 5.75% = $ 705,123

F - Profit on New Revenue = C * D = $ 13,857,190 * 5.75% = $ 796,788

G - Increase in Profit = F - E = $ 796,788 - $ 705,123 = $ 91,666

H - Purchase Cost as Percentage of Revenue = 56%

I - Purchase Cost on Current Revenue = A * H = $12,263,000 * 56% = $ 6,867,280

J - Percentage reduction in Purchase Cost to sustain Increase in Profit without increasing Sales = G*100/I = $91,666*100/$ 6,867,280 = 1.33 %