Question

Hau Lee​ Furniture, Inc., spends 50​% of its sales dollars in the supply chain and finds its current profit of $28,000 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 $33,000 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 $33,000? What is the cost of material with a $33,000 profit? in material (supply-chain) costs is required to yield a profit of $33,000, for a new material cost of : S(Enter your response for the percentage A decrease of decrease to one decimal place and enter your response for the new material cost as a whole number) b) What percentage improvement is needed in the sales strategy for profit to improve to $33,000? What must sales be for profit to improve to $33,000? An increase of% in sales is required to yield a profit of $33,000, for a new 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

We need to approach the two parts separately. This is because currently the percentages that are shown are only for the current situation.

a)

In order to maintain same level of sales and reduce the cost of material, we will have to change the cost of material spending. This means that sales will remain at 140000. However, the cost of material should be reduced so that overall profit increases to 33000. The result is that we just need to cut the cost of material. Keep in mind that all other costs will remain the same here.

So reduce cost of material by (33000-28000) = 5000. That makes the cost of material to be 65000.

This means that the percentage decrease is 5000/70000 = 0.071 or 7.1%

The new material cost is 70000-5000 = $65000

b)

Here we need to make sure that the cost of material will maintain 50% of the sales cost. So will the production costs. This is because these are variable costs. However, the fixed cost will remain as it is. Considering this, let the sales value be X. Then we can equate it as

X – (0.5X + 0.15X +21000) = 33000

0.35X – 21000 = 33000

X = (33000 + 21000)/0.35 = 154285.71 or 154286

So if we make sales of 154285.71 then our profit will be 33000.

This means the percentage increase is (154286-140000)/140000 = 0.102 or 10.2%

The new level of sales is $154286