A marketing company prides itself on its sales prowess and is looking for ways t

Question

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 10% increase in sales to meet the profitability goals. The company currently has revenues of $8,000,000 (annually), spends 64% of its revenues on purchases, and has a net profit margin of 7.75%. 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 10%). If the company is able to reach its goal of increasing sales by 10%, by how much would its revenue increase? (Display your answer as a whole number.)

Question 3 options:

SM.65 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 10% increase in sales to meet the profitability goals. The company currently has revenues of $8,000,000 (annually), spends 64% of its revenues on purchases, and has a net profit margin of 7.75%.

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 10%).

If the company is able to reach its goal of increasing sales by 10%, by how much would its revenue increase? (Display your answer as a whole number.)

If the company is able to reach its goal of increasing sales by 10%, by how many dollars would its profit increase? (Display your answer as a whole number.)

By what percentage would they have to decrease purchasing expenses to equal the bottom-line benefits of a 10% increase to revenues? (Write your answer as a percentage and display your answer to two decimal places.)

Explanation / Answer

(a)Assuming the fact that sales is the only mode of revenue for the company, then if sales increase by 10%, revenue will also increase by 10% ($800,000)

(b) If company increases the sales by 10%, then Increased revenue = $800,000

Increased profits = net profit margin * increased revenue = 7.75% * $800,000 = $62,000

(c) Current Revenue = $8,000,000

Spend on purchases = 64% * 8,000,000 = $5,120,000

From (b), we know that to reach the target, profit should be increased by $62,000.

In order to compensate this without increasing sales, purchase spend should decrease by the same amount

So Percentage decrease in purchasing expenses = (62,000/8,000,000)*100 = 0.775%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.