You are a modest purchasing intern working for this company and you want to show
ID: 2644694 • Letter: Y
Question
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 14%).
$ million (Round your answer to two decimal places.)
$ million (Round your answer to four decimal places.)
% (Round your answer to four decimal places.)
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 14% increase in sales to meet the profitability goals. The company currently has revenues of $140 million (annually), spends 59% of its revenues on purchases, and has a net profit margin of 3.75%.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 14%).
Explanation / Answer
A B C % (for base case) Base case 14% increase in sales Sales constant Profit margin = PM of 14% increase in sales (of base case) % ( for Case C) Sales 100 140,000,000 159,600,000 140000000 100.0000 Purchases 59% 59.0000 82600000 94,164,000 81865000 58.4750 Overhead (100 -59-3.75) 37.2500 52150000 59,451,000 52150000 37.2500 Profit 5250000 5985000 5985000 profit margin 3.75% 3.7500 5250000 5,985,000.00 5985000 4.2750 Answers: 4)Increase in revenue (15960000 - 140000000) 19,600,000 5)Increase in Profit (5985000 - 5250000) 735,000.00 6)Decrease in purchases (82600000 - 81865000) 74435000 % decrease (59 -58,4750) 0.5250% Assumptions: Sales% -Purchase % - Profit margin % = Other OH costs Purchases and OH costs move in proportion to sales In case C, as sales is same as base case (A) , OH remain the same
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