Question

Hau Lee Furniture, Inc., spends 45% of its sales dollars in the supply chain and finds its current profit of $35,000 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 $40,000 so he can obtain the bank's approval for the loan. Current Situation Sales $140,000 $63,000 (45%) $21,000 (15%) $21,000 (15%) $35.000 (25%) Cost of material Production costs Fixed cost Profit

​a) What percentage improvement is needed in the supply chain strategy for profit to improve to​ $40,000​? What is the cost of material with a ​$40,000 profit?

A decrease of ___% in material​ (supply-chain) costs is required to yield a profit of ​$40,000​ for a new material cost of ​$____.

B) What percentage improvement is needed in the sales strategy for profit to improve to $40,000? What must sales be for profit to improve to $40,000?

An increase of __% in sales is required to yield a profit of $40,000, for a new level of sales of $___.

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Answer 1

a)

Dollar improvement needed in supply chain strategy to improve profit to $ 40,000 = 40000 - 35000 = $ 5,000

% Decrease in material costs = 5000/63000 = 7.94 %

New Cost of material = 63000 - 5000 = $ 58,000

A decrease of _7.94_% in material​ (supply-chain) costs is required to yield a profit of ​$40,000​ for a new material cost of ​$__58,000_.

b)

Cost of material and Productions costs make 45%+15% = 60% of Sales.

So, Fixed cost and Profit is equal to 100% - 60% = 40% of sales

New level of sales = (21000+40000)/0.4 = $ 152,500

% increase in sales = (152500-140000)/140000 = 8.93 %

An increase of _8.93_% in sales is required to yield a profit of $40,000, for a new level of sales of $_152,500_.