Hau Lee Furniture, Inc., spends 45% of its sales dollars in the supply chain and

Question

Hau Lee Furniture, Inc., spends 45% of its sales dollars in the supply chain and finds its current profit of $24,000 inadequate. The bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. Hau would like to improve the profit line to $29,000 so he can obtain the bank's approval for the loan. Current Situation Sales $80,000 Cost of material $36,000 (45%) Production costs $12,000 (15%) Fixed cost $8,000 (10%) Profit $24,000 (30%)

A) answer 13.9% in material (supply-chain) costs is required to yield a profit of $31,000

b) What percentage improvement is needed in the sales strategy for profit to improve to $29,000? What must sales be for profit to improve to $29,000? ANSWER for B An increase of 15.6% in sales is required to yield a profit of 29,000, for a new new level of sales of $92,500 (Enter your response for the percentage increase to one decimal place and enter your response for the new sales as a whole number.) I know the answers to both A and B But I can't figure out how the got the answer to B when I look at the examples and I try to recalculate and duplicate it doesn't work out with the answer that is given.

Explanation / Answer

A) increase in profit required = 29000 - 24000 = 5000

So improvement required in supply chain costs = 5000

Percentage improvement = 5000/36000 = 13.9 %

B) Total percentage of cost of material and production cost = 45%+15% = 60%

Contribution margin = 1 - 60% = 40%

Sales required to make profit of 29000 = (Fixed cost + Profit) / Contribution margin = (8000+29000)/40% = 92500

Percentage improvement needed in sales = (92500-80000)/80000 = 15.63 %

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