Question

Assume Inventory Holding Cost is set at 15%.

Using the data below , compute the impact on the key financial metrics on the following scenario:

The company followed an initiative that would reduce the COGS by by 5% and would also reduce Accounts Payable by 20%. (They negotiated lower prices of raw materials by promising to pay their suppliers quicker.)

	Base
	$
Sales	1,028.0
Cost of Sales	621.0
Gross Profit	407.0
Operating Expenses (incl SG&A)	340.0
Operating Profit	67.0
Interest Expense	0.0
Other Income	0.0
Pre-Tax Profit	67.0
Taxes (25%)	16.8
Net Profit	50.3

HINT: To answer this question think about How would you present your analysis for Scenario #1 to a company that focuses on:

(i) Operational Excellence? (ii) Product Innovation?

Answer 1

Income Statement :-

Particulars	Amount($)
Sales	1028.00
Less : Cost of Sale/Cost of Goods Sold ($621-($621*5%))	589.95
Gross Profit	438.05
Less : Operating Expenses	(340)
Operating Profit	98.05
Less : Interest Expenses	(0)
Less : Other Income	(0)
Pre Tax Profit	98.05
Less : Tax @25%	(24.51)
Net Profit	73.54