If the cost of materials were not reduced, then what increase in sales does the firm need to register in order to increase profit by ten thousand dollars?
1) Caravan Engineering’s income statement is given below.
|
|
$ 000s |
|
Sales |
1000 |
|
Direct Materials |
500 |
|
Direct Labor |
200 |
|
Gross Profit |
300 |
|
Selling & Administrative Expenses |
250 |
|
Net Profit |
50 |
At their current activity levels, direct materials are fifty percent of sales, and direct labor is twenty percent of sales. The supply manager at the firm has implemented a value analysis program (resulting in purchase of less costly materials, and standardization of custom-made materials) and managed to reduce the cost of materials by two percent. There is no change in the firm’s sales; the two percent reduction in the cost of materials, and the effect on net profit is given below.
|
|
$ 000s |
|
Sales |
1000 |
|
Direct Materials |
490 |
|
Direct Labor |
200 |
|
Gross Profit |
310 |
|
Selling & Administrative Expenses |
250 |
|
Net Profit |
60 |
If the cost of materials were not reduced, then what increase in sales does the firm need to register in order to increase profit by ten thousand dollars?
Hint:
Let X be the Required Sales; then __ X is the Cost of Materials and __ X is the Labor Cost.
Sales = Variable Cost + Fixed Cost +/- Profit
where,
Sales = X,
Variable cost = (__ X which is the Cost of Materials) + (__ X which is the Labor Cost),
Fixed cost = Sales & Administrative Expenses
+/- Profit = +/- Net Profit
Solve for X
Increase in Sales = (X, which is the Required sales) – (Current sales)
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