Question

Hau Lee​ Furniture, Inc., spends 45​% of its sales dollars in the supply chain and finds its current profit of 24,000 inadequate. The bank is insisting on an improved profit picture prior to the approval of a loan for some new equipment. Hau would like to improve the profit line to ​$29,000 so he can obtain the​ bank's approval for the loan.

                                                                                                                                                                                                                                                                                                                                           

	Current Situation
Sales	​$80,000
Cost of material	​$36,000 ​(45​%)
Production costs	$12,000 ​(15​%)
Fixed cost	​$8,000 ​(10​%)
Profit	​$24,000 ​(30​%)

​a) What percentage improvement is needed in the supply chain strategy for profit to improve to

​$29,000​? What is the cost of the material with a​ $29,000 profit?

A decrease in 13.89​% in material​ (supply-chain) costs is required to yield a profit of $29,000​, for a new material cost of ​$31000.

​(Enter your response for the percentage decrease to one decimal place and enter your response for the new material cost as a whole​ number.)

Fill in blanks for B.

​b) What percentage improvement is needed in the sales strategy for profit to improve to $29,000​? What must sales be for-profit to improve to

​$29,000​? An increase of ________ in sales is required to yield a profit of ​$29,000​, for a new level of sales of ​__________

​(Enter your response for the percentage increase to one decimal place and enter your response for the new sales as a whole​ number.)

Answer 1

Since subpart (a) of the question is already solved, sub-part (b) is solved below :

The equation for profit is :

Profit = Sales - Cost of material - Production costs - Fixed Cost

Let the sales after increase be $x.  

Now, putting the value in the equation for profit to improve to $29,000,

$29000 = $x - ($0.45x) - ($0.15x) - $8000

=> $29000 = $0.4x - $8000

=> x = $92,500

Percentage increase in sale = 92,500-80,000/80,000*100 = 15.6%

An increase of 15.6% in sales is required to yield a profit of ​$29,000​, for a new level of sales of ​$92,500.

Note: Fixed cost is not taken as 10% of the sales since it is not variable and does not change with a change in the sales.