11.3 Hau Lee Furniture, Inc., described in Example 1 of this chapter, finds its
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Question
11.3 Hau Lee Furniture, Inc., described in Example 1 of this chapter, finds its current profit of $10,000 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.
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?
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?
Please provide steps so that I can better understand how the answer is found.
Sales Cost of materials Production costs Fixed costs Profit CURRENT SITUATION 100,000 $60,000 (60%) $20,000 (20%) $10,000 (10%) $10,000 (10%) SUPPLY CHAIN STRATEGY 100,000 $55,000(55%) $20,000(20%) $ 10,000 (10%) $15,000(15%) SALES STRATEGY $125,000 $75,000 (60%) $25,000 (20%) $10,000 (8%) $15,000 (12%)Explanation / Answer
Answer to question a :
For profit to improve to $25,000 from current level of $10,000, increase in profit = $25000 - $10000 = $15,000
Relevant supply chain strategy for profit to improve by $15,000 will be to reduce cost of material by $15,000
Current value of cost of material = $60,000
Therefore reduced value of cost of material = $60,000 - $15,000 = $45,000
Therefore , percentage improvement required in supply chain strategy
= $15,000 improvement required/ $60,000 original cost of material x 100
= 25%
PERCENTAGE IMPROVEMENT REQUIRED IN SUPPLY CHAIN STRATEGY = 25%
COST OF MATERIAL WITH $25,000 PROFIT = $45,000
Answer to question b :
Let the revised sales value = S
Since percentage of cost of material ( 60% ) and percentage of production cost ( 20% ) , totalling 80% remain unchanged, total cost of material and production will be = 0.6 S + 0.2.S = 0.8.S when revised sales value = S
Fixed cost ( remains unchanged ) = $10,000
Profit = $25000
Since ,
Sales = Material cost + Production cost + Fixed cost + Profit
Therefore,
S = 0.6.S + 0.2.S + $10,000 + $25,000
Or, S = 0.8.S + 35000
Or, 0.2.S = 35000
S = 35000/0.2 = 175,000
Percentage improvement required in sales strategy
= ( Revised Sales value – Original sales value ) / Original sales value x 100
= ( 175,000 – 100,000)/ 100,000 x 100
= 75 %
SALES FOR PROFIT TO IMPROVE TO $25,000 WILL BE $175,000
PERCENTAGE IMPROVEMENT REQUIRED IN SALES STRATEGY = 75%
PERCENTAGE IMPROVEMENT REQUIRED IN SUPPLY CHAIN STRATEGY = 25%
COST OF MATERIAL WITH $25,000 PROFIT = $45,000
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