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 $32,000,000 (annually), spends 55% 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?

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) Current revenue = $ 32 million

Revenue growth target = 5%

Revenue increase in dollars = 32*5% = $ 1.6 million  

2) For revenue increase of 5%, increase in net profit margin = 1,600,000*2.75% = $ 44,000

So to achieve the same effect, purchasing expenses have to be reduced by $ 44000

Current purchase expenses = 32,000,000*55% = $ 17,600,000

Percentage decrease in purchasing expenses required = 44000/17600000 = 0.25 %

3) Sales increase targeted percentage / Purchasing expense decrease targeted percentage = 5% / 0.25% = 20  

The sales increase targeted percentage is __20___ times bigger than the required percentage decrease in purchasing expenses.

This effect is called profit leveraging effect of purchasing.

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