Concept explainers
Hau Lee Furniture, Inc., described in Example 1 of this chapter, finds its current profit of $10,000 inadequate. The bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. Hau would like to improve the profit line to $25,000 so he can obtain the bank’s approval for the loan.
a) What percentage improvement is needed in the supply chain strategy for profit to improve to $25,000? What is the cost of material with a $25,000 profit?
b) What percentage improvement is needed in the sales strategy for profit to improve to $25,000? What must sales be for profit to improve to $25,000?
a)
To determine: The material cost and percentage change in material cost using supply chain strategy for a profit of $25,000 in Company HL.
Introduction: Supply chain management is one of the important elements of a business which impacts business product development. With expanding business in global conditions, supply chain activities can impact on the cost effectiveness of the business.
Answer to Problem 2P
Using supply chain strategy 25% decrease in material cost is required to yield profit of $25,000.
Explanation of Solution
Given information:
Particulars | Amount | Percentage |
Sales | $100,000 | |
Material cost | $60,000 | 60% |
Production cost | $20,000 | 20% |
Fixed cost | $10,000 | 10% |
Profit | $10,000 | 10% |
Supply chain strategy:
Supply chain strategy | Amount | Percentage increase or decrease |
Sales | $100,000 | |
Material cost | $45,000 | -25% |
Production cost | $20,000 | 0% |
Fixed cost | $10,000 | 0% |
Profit | $25,000 | 150% |
Calculation of percentage changes using supply chain strategy:
Company HL estimates to increase its profit from $10,000 to $25,000.
Percentage of material cost for profit of $25,000:
For an expected profit for $25,000 from $10,000, the estimated percentage of material cost is 45%.
Material cost for an expected profit $25,000:
Percentage change in material cost for an expected profit $25,000:
The material cost decreased by 25%.
Change in profit percentage:
The percentage change in profit, when profit rises from $10,000 to $25,000 is 150%.
Hence, by using supply chain strategy 25% decrease in material cost is required to yield profit of $25,000.
b)
To determine: The sales and percentage change in sales using sales strategy for a profit of $25,000 in Company HL.
Answer to Problem 2P
Using sales strategy 75% increase in sales is required to yield profit of $25,000.
Explanation of Solution
Given information:
Particulars | Amount | Percentage |
Sales | $100,000 | |
Material cost | $60,000 | 60% |
Production cost | $20,000 | 20% |
Fixed cost | $10,000 | 10% |
Profit | $10,000 | 10% |
Sales Strategy:
Sales strategy | Amount | Percentage increase or decrease |
Sales | $175,000 | 75% |
Material cost | $105,000 (60%) | 75% |
Production cost | $35,000(20%) | 75% |
Fixed cost | $10,000 | 0% |
Profit | $25,000 | 150% |
Calculation of percentage changes using sales strategy:
Calculate the percentage increase in the sales:
Sales increase to $175,000 when profit is $25,000.
Change in material cost:
For an estimated profit of $25,000, the sales changes to $175,000 and hence due to change in sales there is also change in material cost. Material cost is 60% of sales. Therefore for sales of $175,000, the material cost is $105,000.
Percentage change in material cost:
The percentage change in material cost is 75% when the sales increase to $175,000.
Change in production cost:
For an estimated profit of $25,000, the sales changes to $175,000 and hence due to change in sales there is also change in production cost. Production cost is 20% of sales. Therefore for sales of $175,000, the production cost is $35,000.
Percentage change in production cost:
The percentage change in production cost is 75% when the sales increase to $175,000.
Change in sales percentage:
The percentage change in sales, when profit rises from $10,000 to $25,000 is 75%.
Hence, by using sales strategy 75% increase in sales is required to yield profit of $25,000.
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