Question

Kamal Fatehl production manager of Kennesaw? Manufacturing, finds his profit at ?$39 comma 200 ?(as shown in the statement? below) inadequate for expanding his business. The bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. Kamal would like to improve profit line to ?$49 comma 200 so he can obtain the? bank's approval for the loan. ?% of sales Sales 280 comma 000 ?100% Cost of supply chain purchases 182 comma 000 65?% Other production costs 30 comma 800 11?% Fixed costs 28 comma 000 10?% Profit 39 comma 200 14?% ?a) What percentage improvement is needed in a supply chain strategy for profit to improve to ?$49 comma 200?? What is the cost of material with a ?$49 comma 200 ?profit? A decrease of nothing?% in? supply-chain costs is required to yield a profit of ?$49 comma 200?, for a new cost of supply chain purchases of ?$ nothing. ?(Enter your response for the percentage decrease to one decimal place and enter your response for the new supply chain cost as a whole? number.) ?b) What percentage improvement is needed in a sales strategy for profit to improve to ?$49 comma 200?? What must sales be for profit to improve to ?$49 comma 200?? An increase of nothing?% in sales is required to yield a profit of ?$49 comma 200?, for a new new level of sales of ?$ nothing. ?(Enter your response for the percentage increase to one decimal place and enter your response for the new sales as a whole? number.)

Answer 1

To be calculated:

(a) Required percentage improvement in supply chain strategy

(b) New cost of material

(c) Required percentage improvement in sales strategy

(d) New level of sales

Solution:

(Part-A)

Current profit = $39,200

Desired profit = $49,200

Required increase in profit = Desired profit - Current profit

Required increase in profit = $49,200 - $39,200

Required increase in profit = $10,000

Given the values of other factors remaining the same (unchanged) such as sales, other production costs and fixed costs, the change in the cost of supply chain purchases will be equal to the required increase in the profit to improve to $49,200 from current $39,200.

New Cost of Materials or Cost of supply chain purchases will be calculated as;

New Cost of Materials = Current Cost of Materials - Required Increase in Profit

New Cost of Materials = $182,000 - $10,000

New Cost of Materials = $172,000

The percentage decrease in material costs is calculated as;

Percentage decrease = (New material costs - Old material costs) / Old material costs x 100

Percentage decrease = [($172,000 - $182,000) / $182,000] x 100

Percentage decrease = (- $10,000 / $182,000) x 100

Percentage decrease = - 5.49% (negative sign denotes decrease in costs)

Answer: A decrease of 5.5% in? supply-chain costs is required to yield a profit of ?$49,200?, for a new cost of supply chain purchases of ?$172,000

(Part-B)

Current profit = $39,200

Desired profit = $49,200

In the current scenario, Profit = 14% of sales

For a profit of $49,200, let the new sales = x

Therefore,

New Profit = 14% of x = 49,200

x = $351,428.571 or $351,429

New sales = $351,429 (100%)

New Cost of Materials = $228,429 (65%)

New Production Costs = $38,657 (11%)

New Fixed Costs = $35,143 (10%)

New Profit = $49,200 (14%)

The percentage improvement in the sales strategy is calculated as;

Percentage increase = (New sales - Old sales) / Old sales x 100

Percentage increase = [($351,429 - $280,000) / $280,000] x 100

Percentage increase = ($71,429 / $280,000) x 100

Percentage increase = 25.51%

Answer: An increase of 25.5% in sales is required to yield a profit of ?$49,200?, for a new new level of sales of ?$351,429.