Kamal Fatehl production manager of Kennesaw Manufacturing, finds his profit at $
ID: 461859 • Letter: K
Question
Kamal Fatehl production manager of Kennesaw Manufacturing, finds his profit at $31,200 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 $41,200 so he can obtain the bank's approval for the loan
% of Sales
Sales $240,000 100%
Cost of supply chain purchases 156,000 65%
Other production costs 26,400 11%
Fixed Costs 26,400 11%
Profit 31,200 13%
a. What percentage improvement is needed in a supply chain strategy for profit to improve to $41,200? What is the cost of the material with a $41,200 profit? A decrease of ____% in supply chaing costs is required to uield a profit of $41,200 for a new cost of supply chaing purchases of $______.
b. What percentage improvement is needed in a sales strategy for a profit of $41,200? What must sales be for profit to improve to $41,200$. An increase of ____% in sales is required to yiled a profit of $41,200, for a new level of sales of $______.
Explanation / Answer
a). % improvement in supply chain strategy to achieve profit of $ 41200 = (41200-31200)/156000 = 6.41% decrease
New Supply chain purchase = 156000-41200+31200 = $ 146,000
b). When we improve sales, Fixed cost remains same, but variable costs increase in proportion to sales.
Variable costs comprise cost of supply chain purchases and other production costs = 65% + 11% = 76%
Therefore Sales required to achieve profit of $ 41200 = (Profit + Fixed cost) / (1 - Variable cost %) = (41200+26400) / (1 - 76%) = $ 281,667
% improvement in sales required = (281667 - 240000) / 240000 = 17.36% increase
New Level of Sales = 240000 * (1+17.36%) = $ 281,667 (as already determined above)
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