Question

Hau Lee Furniture, Inc., spends 50% of its sales dollars in the supply chain and finds its current profit of $28,000 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 $33,000 so he can obtain the bank's approval for the loan. Sales Cost of material Production costs Fixed cost Profit Current Situation $140,000 $70,000 (50%) $28,000 (20%) $14,000 (10%) $28,000 (20%) a) What percentage improvement is needed in the supply chain strategy for profit to improve to $33,000? What is the cost of material with a $33,000 profit? A decrease of 7.1 % in material (supply-chain) costs is required to yield a profit of $33,000, for a new material cost of $ 65000 . (Enter your response for the percentage decrease to one decimal place and enter your response for the new material cost as a whole number.) b) What percentage improvement is needed in the sales strategy for profit to improve to $33,000? What must sales be for profit to improve to $33,000? An increase of 17.8 % in sales is required to yield a profit of $33,000, for a new new level of sales of $ 165000. (Enter your response for the percentage increase to one decimal place and enter your response for the new sales as a whole number.)

QUESTION B = ?

Answer 1

a) decrease of 7.1 % in material cost for a new material cost of $ 65,000 b) increase of 11.9 % in sales for a new level of sales of $ 156,667 Explanation: (a) In Supply chain strategy, Sales, Production costs and fixed costs will remain same as current situation. Only Material cost will be changed to make the profit equal to $ 33000. So the absolute value of material cost will become 70000 - (33000 - 28000) = $ 65,000. Percentage change in material costs = (old cost-new cost)/old cost = (70000 - 6500)/70000 = 7.14% decrease in material cost. (b) In Sales strategy, dollar value of fixed cost and percentage of cost of material, production costs will remain fixed. Cost of material and production together comprise 50%+20% = 70% of Sales. So, contribution to profit and fixed cost together comprise 30% of Sales. Target sales to achieve profit of $ 33000 = (Fixed cost + Desired profit) / 30% Target sales to achieve profit of $ 33000 = (14000 + 33000) / 30% Target sales to achieve profit of $ 33000 = $ 156,667 Increase in Sales = (156667-140000)/140000 = 11.9%