Question

Based on the performance of G & E Productions who is making a gross profit of 6.67% and net profit of 8.27% in 2018. Briefly discuss TWO (2) recommendations you would make to ensure improved performance in the future

Answer 1

As the net Income % is more than Gross Profit % of G&E Productions, it indicates that the Indirect Incomes ( income from commission, rent, investments , interest etc) are more than the indirect expenses.

For G&E , the real scope is in improving the Gross Profit margin.

Two recommendations to G&E for improved performance in the future ;

1. Reducing the COGS cost by reduction of Direct Materials cost. This can be achieved by negotiating a better deal with the vendor or finding substitute materials with better quality and lower cost. The materials consumption cost van also be reduced by reducing scraps and wastage by better process management , better handling and storing and by better input quality control. All these factors can help G&E to reduce direct materials cost part of COGS and improve the Gross profit in the long term basis.

2. Reducing COGS by reducing Direct labor cost. As direct labor cost is a sizable part of the COGS , G&E may attempt reduction of this component by recruiting labors with correct skill set and training the labors in productivity improvement processes like TQM, Kaizen, Kanban that will skill up the labors. Effective utilization of labor by proper production planning , reducing break downs and unscheduled maintenance can help in improving labor efficiencies and reducing labor cost . There factors can help G&E reducing the labor cost component of COGS and achieve higher gross profit on a long term basis.