Question

You are the CSCO for Swashbuckler Enterprises (SE). You CEO just left your office and she is not happy. She thinks all the SCM department does is spend, spend, spend and never creates value for the firm. Furthermore, she holds up the Marketing department as the primary source of revenue and hence, customer effectiveness. In order to exonerate the SCM department and ultimately, your own name, you have decided to run the numbers on your most recently concluded negotiation (Q4 of 2016) to show once and for all how SCM can create value. In this negotiation, you were able to get your supply base to reduce the COGS by 8%. Assignment: Using the numbers below in Table 1, answer the questions below. Table 1 Earnings and Expenses for Q4. 2016: Pre-negotiation Sales $9,250,000 Cost of Goods Sold $8,500,000 Profit $750,000 1. What is the new COGS after the 8% negotiated reduction? 2. What is the resulting new profit? 3. What is the difference between the old and new profit, both in terms of dollar amount and percentage? 4. What is the resulting new contribution to profit, per dollar of sales? 5. How much does the Marketing department need to increase sales in order to match the same increase in profit? NOTE: Round your answers up Your SCM department has been able to negotiate an additional 4% reduction in the COGS. Using the sales figure from Table 1 and your answers to questions 1-3, answer the following. 6. Using your answers to questions 1-3 as the base, what is the resulting new increase in profit because of the additional 4% reduction in COGS? 7. How much does the Marketing department need to increase sales in order to match the new increase in profit? Give step by step instructions.

Answer 1

1. 8% reduction in COGS

current COGS = 8500000

new COGS = 8500000 - 8%*8500000 = 8500000 - 680000 = 7820000

2. new profit = sales - new COGS

= 9250000 - 7820000

= 1430000

3. difference between old and new profit = 1430000 - 750000 = 680000

% terms = difference/750000 = 680000/750000 = 0.9067 = 90.67%

Hence profit is 90.67% more than the old profit

4. contribution to profit per dollar of sales = profit/sales = 1430000/9250000 = 0.1546

Hence, contirbution to profit, per dollar of sales is 0.1546

5. considering old profit and ols COGS:

to increase the profit to 1430000, the profit increase required = 680000

ratio of COGS to Sales = COGS/Sales = 8500000/9250000 = 0.919

let the new sales be x

x - 0.919x = new profit, new profit = 1430000

x(1-0.919) = 1430000

x = 1430000/0.081

x = 17654321

New sales required = 17654321

hence increase in sales required by marketing dept = 17654321 - 9250000 = 8404321