Kamal Fatehl production manager of Kennesaw Manufacturing, finds his profit at $

Question

Kamal Fatehl production manager of Kennesaw Manufacturing, finds his profit at $14,400 (as shown in the statement below) inadequate for expanding his business The bank is insisting on an improved profit picture prior to approval of a loan for some new equipment. Kamal would like to improve profit line to $24,400 so he can obtain the bank's approval for the loan Sales Cost of supply chain purchases Other production costs Fixed costs Profit 240,000 172,800 24,000 28,800 14,400 % of sales 100% 72% 10% 12% 6% a) What percentage improvement is needed in a supply chain strategy for profit to improve to $24,400? What is the cost of material with a $24,400 profit? A decrease of 5.8 % in supply-chain costs is required to yield a profit of $24,400, for a new cost of supply chain purchases of $ 162800 . (Enter your response for the percentage decrease to one decimal place and enter your response for the new supply chain cost as a whole number.)

Explanation / Answer

Note: Since answer to Part a) is already given and is also correct, only Part b) is answered.

b) To improve the profit from $14,400 to $24,400, the sales are required to be increased. This leads to an increase in cost of supply chain purchases also (assuming they are direct costs which vary with sales). They are 72% of sales. Hence contribution is 28% of sales.

Required contribution to achieve profit of $24,400 = $24,400 + $28,800 + $24,000 = $77,200

Hence, required sales = $77,200 / 28% = $275,714.2857 = $275,715

% increase in sales = [(275,715-240,000)/240,000] * 100 = 14.8813% = 14.9%

Note: It is assumed that other production costs are fixed in nature and do not vary with sales.

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