SimmonsSimmons Company has recently become aware of the large total discounts on its orders and would...
SimmonsSimmons
Company has recently become aware of the large total discounts on its orders and would like to know the impact on profit. The company computed its operating profit as follows:
|
Net sales after discounts |
$130,000 |
|
Variable costs |
60,000 |
|
Contribution margin |
$70,000 |
|
Fixed costs |
5,000 |
|
Operating profit |
$65,000 |
Requirements
|
(a) |
Suppose
SimmonsSimmons could reduce its sales discounts to produce a3030% increase in net revenues but no changes in variable or fixed costs. By what percent would operating profits increase? How does this percentage compare to the percentage increase in net sales revenue? |
||||||||||||||||||||||||||||||
|
(b) |
Refer to the original information in this problem. Suppose
SimmonsSimmons' salespeople increase sales discounts to produce a99% decrease in net revenues, with no change in variable or fixed costs. By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue? |
||||||||||||||||||||||||||||||
|
(c) |
Consider the ratio of operating profit to sales. How does this ratio relate to the percentage change in operating profit, for a given percentage change in the net sales revenue? Requirement (a) Suppose SimmonsSimmons could reduce its sales discounts to produce a 3030% increase in net revenues but no changes in variable or fixed costs. By what percent would operating profits increase? How does this percentage compare to the percentage increase in net sales revenue?Begin by calculating the operating profit with a 3030% increase in net revenues but no changes in variable or fixed costs.
By what percent would operating profits increase? How does this percentage compare to the percentage increase in net sales revenue? A 3030% increase in net revenues would result in a(n) nothing% increase in operating profit. The percentage increase in operating profits is ▼ than the percentage increase in net sales revenues.Requirement (b) Refer to the original information in this problem. Suppose SimmonsSimmons' salespeople increase sales discounts to produce a 99% decrease in net revenues, with no change in variable or fixed costs. By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue?Begin by calculating SimmonsSimmons' operating profit if its salespeople increase sales discounts to produce a 99% decrease in net revenues, with no change in variable or fixed costs.
By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue? SimmonsSimmons's operating profits would decrease by nothing%. The percentage decrease in operating profits is ▼ greater less than the percentage decrease in net sales revenue. Requirement (c) Consider the ratio of operating profit to sales. How does this ratio relate to the percentage change in operating profit, for a given percentage change in the net sales revenue? The higher the ratio of operating profit to sales, the ▼ larger smaller the change in operating profit percentage for a given percentage change in the net sales revenue. |
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Homework Answers
| a. | b. | ||
| Original case | 30% increase in Net revenues | 9% decrease in Net revenues | |
| Net sales after discounts | 130000 | 169000 | 118300 |
| Variable costs | 60000 | 60000 | 60000 |
| Contribution margin | 70000 | 109000 | 58300 |
| Fixed costs | 5000 | 5000 | 5000 |
| Operating profit | 65000 | 104000 | 53300 |
| a.Operating profits will increase by | |||
| (104000-65000)/65000= | 60% | ||
| TWICE the % inc. in net revenues | |||
| The percentage increase in operating profits is GREATER than the percentage increase in net sales revenues. | |||
| b.Operating profits will decrease by | |||
| (65000-53300)/65000= | 18% | ||
| TWICE the % dec. in net revenues | |||
| The percentage decrease in operating profits is GREATER than the percentage decrease in net sales revenues. | |||
| c. Operating profit/sales(Base case) | |||
| 65000/130000= | 50% | ||
| % Change in sales revenue(increase) | 30% | ||
| % change in Opg. Profits(60%-50%)= | 10% | ||
| Change in opg. Profit% for 1% change in net sales revenue= | |||
| 10%/30%1%= | 33.33% | ||
| % Change in sales revenue(Decrease) | 9% | ||
| % change in Opg. Profits(50%-18%)= | 32% | ||
| Change in opg. Profit% for 1% change in net sales revenue= | |||
| 32%/9%*1%= | 3.56% | ||
| So, Answer c. wil be | |||
| The higher the ratio of operating profit to sales, the | |||
| LARGER | |||
| the change in operating profit percentage for a given percentage change in the net sales revenue. | |||
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