Question

Determine the sales necessary to equal a dollar of savings on purchases for a company that has a net profit of 4% and spends 50% of its revenues on purchases.

Answer 1

Let the sales value = 100.S

Therefore , value of purchase = 50.S

Profit = 4.S

We also have to note that :

Sales – Purchase – Other production cost = Profit

Or, 100.S – 50.S – Other production cost = 4.S

Or, 50S – Other production cost = 4.S

Or, Other production cost = 46.S

Thus , when there is $1 saving in purchase, purchase cost becomes $ 49 S. and profit become $4S + $1

Let the revised sales figure to make total profit = $5.S will be = ( 100.S + d )

Purchase cost remains unchanged at 50.S

Revised “other production cost” which should be proportional( @46 %) to sales cost = $46S + 0.46.d

Since,

Sales – Purchase – Other production cost = Profit

Therefore ,

( 100.S + d ) – 50.S – ( $46S + 0.46.d) = $4S.+ 1,

Or, ( 100.S – 50.S – 46.S) + ( d – 0.46.d) = $4.S + 1

Or, $4.S + 0.54.d = $4.S + 1

Or, d = 1/0.54

Or, d = $1.85

SALES NECESSARY TO EQUAL A DOLLAR OF SAVING IN PURCHASE = $1.85