A small regional retailer is looking for ways to increase profits. Given its imp

Question

A small regional retailer is looking for ways to increase profits. Given its impressive record of growth, the sales and marketing vice president wants to target a 5% increase in sales to meet the profitability goals. The company currently has revenues of $37,000,000 (annually), spends 61% of its revenues on purchases, and has a net profit margin of 2.75%.

You are a buyer working for this company and you want to show the vice president that it may be easier to reach the profitability goals by lowering purchasing expenses.

1) If the company achieves its revenue growth target of 5%, by how many dollars would revenue increase? (Display your answer as a whole number.)

2) Assume that revenues stayed flat (meaning the company did not try to increase sales by the 5% target), by what percentage would they have to decrease purchasing expenses to equal the increased profit that would have come from a 5% increase to revenues? (Write your answer as a percentage and display your answer to two decimal places.)

3) The sales increase targeted percentage is _____ (how many) times bigger than the required percentage decrease in purchasing expenses. (Display your answer as a whole number.)

Explanation / Answer

1. With Increase of 5% Revenue

New Revenue = Current Revenue * (1+0.05) = $37,000,000*1.05 =$38,850,000

2. Current Net Profit = Revenue * Net Profit Margin = $37,000,000*2.75% = $1,017,500

Net Profit = Revenue - Total Cost

Total Cost = Revenue -Net Profit

Purchase cost + Fixed Cost =  Revenue -Net Profit

Fixed Cost =  Revenue -Net Profit - Purchase cost =$13,412,500

with 5% Increase in revenue

Net Profit = New Revenue - (Purchase cost + Fixed Cost )

Increased profit = $1,739,000

Revenue - (Purchase cost + Fixed Cost ) = Profit

Purchase cost = Revenue - Profit - Fixed cost =$37,000,000 -$1,739,000 -$13,412,500 =$21,848,500

Purchase cost % of Revenue =Purchase cost /Revenue =$21,848,500/$37,000,000= 59.05%

% Decrease of Purchase cost = 61%-59.05% = 1.95%

c) Sales Increase % / Decrease in % = 5%/1.95% = 2.56

Sales Increase % = 2.56 times % decrease in Purchasing Expenses

Currrent 5% Increased Revenue Revenue $37,000,000 $38,850,000 Purchase Cost $22,570,000 $23,698,500 Net Profit margin 2.75% 4.48% Net Profit $1,017,500 $1,739,000 Fixed Cost $13,412,500 $13,412,500

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