Ford is looking to improve their profitability. As a corporation they have a 15%

Question

Ford is looking to improve their profitability. As a corporation they have a 15% profit margin. They have three potential opportunities and can choose only one. The choices are:

1) they can increase their Sales by $50M through a 5% dealer discount, or

2) reduce their cost of transportation by 1% (their yearly transportation spend is $150M) or

3) they can reduce their warehousing costs by 2% (their yearly warehousing cost is $50M).

Assuming neither of choice 2 or 3 would affect customer satisfaction or sales which of the three choices would you choose and why?

Explanation / Answer

Profit Margin is 15%. Which means,
PM = 15% = Net Income/Sales

now lets evaluate all the 3 options,
1.
If sales are increased by 50M the profitability remains the same. When the sales increase by 50M, the Income increases by 7.5M and hence the net increase in profitability is zero since profitability remains the same.

2. With no effect on sales, the expense reduces by 1.5M, causing the increase in Net Income and hence the profitability.

3. With no effect on sales, the expense reduces by 1M, causing the increase in Net Income and hence the profitability.

But the extent of PM increase is higher in option 2 due to a greater reduction in expenses, Hence Ford should go with option 2.

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