Question

As an Operations Manager (OM) of a million dollar furniture manufacturing firm, you have been asked by your General Manager to work with your colleagues in Marketing and Finance to determine who is able to provide the greatest gain in increasing the bottom line contribution to the company’s profit.

1. Complete the table below and determine the net contribution to profit of each functional area. Note that your GM has provided the required targets for each functional area as compared to the current situation.

2. You have a capex budget of $200,000 and that there are no implementation costs for either Marketing or Finance. Provide a brief recommendation (100 words) to your GM regarding the best approach to increasing profit.

		Current	Marketing Option	Financing Option	OM Option
			Increase Sales Revenue	Reduce Finance Costs	Reduce Production Costs
		Targets	55%	75%	25%
Sales		$ 1,100,000
Cost of Goods		$     850,000
Gross Margin		$     250,000
Finance Costs		$     110,000
Subtotal		$     140,000
Company Tax	30%	$        42,000
Contribution		$        98,000
Change
% Change

Answer 1

Ans.A.

	Current	Marketing Option	Financing Option	OM option
		Increase sales revenue by 55%	Reduce finance costs by 75%	Reduce production costs by 25%
Sales	$1,100,000	$1,705,000	$1,100,000	$1,100,000
Cost of goods sold	$850,000	$850,000	$850,000	$637,500
Gross margin	$250,000	$855,000	$250,000	$462,500
Finance costs	$110,000	$110,000	$27,500	$110,000
Sub total	$140,000	$745,000	$222,500	$352,500
Company tax 30%	$42,000	$223,500	$66,750	$105,750
Contribution	$98,000	$521,500	$155,750	$246,750
Change		$423,500	$57,750	$148,750
% change		432.14%	58.93%	151.79%

Working notes:

1. If marketing option is implemented, sales revenue increase by 55%,i.e, sales revenue will be $1,100,000 * 1.55 = $1,705,000, with all other things remaining same. This makes new contribution to be $521,500 (an increase of $521,500 - $98,000 = $423,500 or 432.14% in bottomline over current plan)

2. If Finance option is implemented, all things remain same with new finance costs = $110,000*(1-75%) = $27,500, the effect of which is $57,750 increase in bottom line or 58.93% increase in bottomline over current plan.

3. If OM option is implemented, cost of goods sold reduce by 25% of $850,000. New cost of goods sold = $637,500. All other things remaining same, new contribution is $246,750,i.e.,$148,750 or 151.79% higher than current plan.

Ans.b. Based on the calculations above, marketing option is the best option to be implemented for increasing profit. It has the capacity for 432.14% increase in profits, much higher than the other two plans. Also, it does not require any implementation costs, so the Company would save the $200,000apex budget it has set aside.