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 $9,612,000 (annually), spends 55% of its revenues on purchases, and has a net profit margin of 7.25%. 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.) 124956 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.) 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.

Answer 1

Company annual revenue: $9,612,000

Company annual spend: 55% of its revenues on purchases = 0.55*9612000 = $5286600

Net profit margin: 7.25% = 0.0725*9612000 = $696870

1. If sales increase by 13%, revenue will also increase by 13%

Annual revenue with 13% increase in sales = 1.13*9612000 = $10861560

Increase in sales = $10861560 - $9612000 = $1249560

2. With new annual revenue of $10861560

Annual spend of the company = 0.55*10861560 = $5973858

Net profit margin = 0.0725*10861560 = $787463

Original profit margin = $696870

Increase in profit margin = $787463 - $696870 = $90593

Hence profit would increase by $90593 if sales increase by 13%

3. Since we want to increase revenue by 13% by not increasing sales but by reducing cost of purchase.

Hence, final cost of purchase or company annual spend = 5286600/1.13 = $4678407

Reduction in company annual spend = $5286600 - $4678407 = $608193

Percentage reduction in company annual spends = (608193/5286600)*100 = 11.50%

Hence annual purchasing expenses would have to decrease by 11.50% to equal the increased profit that would have come from a 13 percent increase to revenues.