Hau Lee Furniture, Inc., spends 50% of its sales dollars in the supply chain and

Question

Hau Lee Furniture, Inc., spends 50% of its sales dollars in the supply chain and finds its current profit of $20,000 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. Sales Cost of material Production costs Fixed cost Current Situation $100,000 $50,000 (50%) $15,000 (15%) $15,000 (15%) $20,000 (20%) 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? A decrease of 10 % in material supply chain costs s required to yield a profit of $25,000 or a new material cost of $ 45000 Enter your response for he percentage 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 $25,000? What must sales be for profit to improve to $25,000? An increase of % n sales is required o yield a p of $25,000 for a new ne eve of sales nt your es efort percentage crease to ned placea er e our response for the new sales as a whole number.)

Explanation / Answer

A.

At present,

cost of material = $50000

Profit = $20000

Required, Profit = 25000

Hence, decease in cost of material = 25000 – 20000 = $5000

Hence, % decrease in supply chain (cost of material) = 5000/50000

% decrease in supply chain (cost of material) = 10%

New material cost = 50000 – 5000

New material cost = $45000

B.

Profit % of the sales = 20000/100000 = 20%

Hence, for profit to be $25000, sales = 25000/20% = $125000

Increase in % of sales = (125000-100000)/10000 = 25%

So,

An increase of 25% in sales is required to yield a profit of $25000, for a new level of sales of $125000.

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