Question

SM.66 A small regional retailer is looking for ways to increase profits. Given its impressive record of growth, the sales and marketing vice president wants to target a 5% increase in sales to meet the profitability goals. The company currently has revenues of $22,000,000 (annually), spends 58% of its revenues on purchases, and has a net profit margin of 2.75%. You are a buyer working for this company and you want to show the vice president that it may be easier to reach the profitability goals by lowering purchasing expenses. If the company achieves its revenue growth target of 5%, by how many dollars would revenue increase? (Display your answer as a whole number.) Assume that revenues stayed flat (meaning the company did not try to increase sales by the 5% target), by what percentage would they have to decrease purchasing expenses to equal the increased profit that would have come from a 5% increase to revenues? (Write your answer as a percentage and display your answer to two decimal places.) (This question is to stretch your mind a bit and to show how much more, on a percentage bases, sales must increase in order to equal the bottom-line benefits of a modest decrease in purchasing expenses. There will not be a question like this on any assessment.) The sales increase targeted percentage is _____ (how many) times bigger than the required percentage decrease in purchasing expenses. (Display your answer as a whole number.)

Answer 1

Revenues = $22,000,000

Purchase expenditure = 0.58 * $ 22,000,000 = $ 12,760,000

Net Income = 0.0275 * $ 22,000,000 = $605,000

1. Increase in revenue = 5%

Hence, dollar increase in revenue = 0.05 * 22,000,000 = $ 1,100,000

2. New profit from increased revenue = 2.75% * 22,000,000 * 1.05 = $ 635,250

Hence, decrease in costs = $ (635,250 - 605,000) = $ 30,250

Hence, % change in purchase expenses = $ 30,250/ $ 12,760,000 * 100% = 0.23%

3. Sales increase % to purchase expense decrease % = 5/0.23 = 21.73