1) A manufacturing company has the following financial information (in millions
ID: 369291 • Letter: 1
Question
1) A manufacturing company has the following financial information (in millions of $):
Sales = 823
Cost of goods sold:
Direct labor = 85
Purchase materials = 310
Overhead =94
All other costs =250
Pretax earnings =84
a. What is the profit leverage effect of purchasing in this company?
b. What is the increase in earnings from an 8 percent savings in purchasing?
2) The famous Widget Company uses simple exponential smoothing to forecast the demand for its best-selling widgets. The company is considering whether it should use = .1 or = .3 for forecasting purposes. Use the following data for daily sales to arrive at a recommendation:
____________________________________________
Day
Demand
Day
Demand
1
35
8
39
2
47
9
24
3
46
10
26
4
39
11
36
5
26
12
43
6
33
13
46
7
24
14
29
Develop and Excel spreadsheet to answer the following questions.
a. For the first seven days of data compare the absolute deviation for forecasts using = .1 and = .3. Start with A0 = 33. Which method is best?
b. Use the second week of data to make the same comparison. Use A7 = 32. Which method is best now?
c. What does this example illustrate?
Day
Demand
Day
Demand
1
35
8
39
2
47
9
24
3
46
10
26
4
39
11
36
5
26
12
43
6
33
13
46
7
24
14
29
Explanation / Answer
a) Profit leveraging effect of purchasing is the impact on profits of the company as a result of reducing the purchasing spend. This is better understood by analyzing the effect of reduction in purchasing spend on the profit of the company.
Let us reduce the spend on materials purchases by 10% (hypothetically speaking).
Reduction in Materials spend = 310*10% = 31
This reduction adds to the pretax earnings (84)
So increase in profit = 31/84 = 37%
So, we see that a 10% reduction in materials purchasing cost resulted in a 37% increase in profits. This is the profit leveraging effect of purchasing.
b) 8% savings in purchasing = 310*8% = 24.8
This is the increase in earnings.
Change in pretax earnings = 24.8/84 = 29.5% increase
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