Principles Of Operations Management
Principles Of Operations Management
11th Edition
ISBN: 9780135173930
Author: RENDER, Barry, HEIZER, Jay, Munson, Chuck
Publisher: Pearson,
Question
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Chapter 11, Problem 3P

a)

Summary Introduction

To determine: Material cost and percentage change in material cost using supply chain strategy for a profit of $25,000 in Company KF.

Introduction: Supply chain management is one of the important elements of a business which impacts business product development. With expanding business in global conditions, supply chain activities can impact on the cost effectiveness of the business.

a)

Expert Solution
Check Mark

Answer to Problem 3P

Using supply chain strategy 5.71% decrease in material cost is required to yield profit of $25,000.

Explanation of Solution

Given information:

Particulars Amount Percentage
Sales $250,000 100%
Cost of supply chain purchases $175,000 70%
Production cost $30,000 12%
Fixed cost $30,000 12%
Profit $15,000 6%

Supply chain strategy:

Supply chain strategy Amount Percentage increase or decrease
Sales $250,000  
Material cost $165,000 -5.71
Production cost $30,000 12%
Fixed cost $30,000 12%
Profit $25,000 66.67%

Calculation of percentage changes using supply chain strategy:

Company KF is expected to increase its profit from $15,000 to $25,000.

Percentage of material cost for profit of $25,000:

Profit=[Sales(Sales×PercentageMaterial cost)(Sales×PercentageProduction cost)Fixed cost]$25,000=[$250,000($250,000×PercentageMaterial)($250,000×12100)$30,000]$25,000=$250,000($250,000×PercentageMaterial)$60,000$25,000=$190,000($250,000×PercentageMaterial)

($250,000×PercentageMaterial)=$190,000$25,000PercentageMaterial=$165,000$250,000=66%

For an expected profit for $25,000 from $10,000, the estimated percentage of material cost is 66%.

Material cost for an expected profit $25,000:

Sales=$250,000Materialcost=66%ofsales=66100×250,000=$165,000

Percentage change in material cost for an expected profit $25,000:

Change in percentage=MaterialcostcurrentMaterialcostinitialMaterialcostinitial×100=$165,000$175,000$175,000×100=5.71%

The material cost decreased by 5.71%.

Change in profit percentage:

Change in profit percentage=ProfitCurrentProfitinitalProfitInitial×100=$25,000$15,000$15,000×100=$10,000$15,000×100=66.67%

The percentage change in profit, when profit rises from $15,000 to $25,000 is 66.67%.

Hence, by using supply chain strategy 5.71% decrease in material cost is required to yield profit of $25,000.

b)

Summary Introduction

To determine: Sales and percentage change in sales using sales strategy for a profit of $25,000 in Company KF.

b)

Expert Solution
Check Mark

Answer to Problem 3P

By using sales strategy 22.22% increase in sales is required to yield profit of $25,000.

Explanation of Solution

Given information:

Particulars Amount Percentage
Sales $250,000 100%
Cost of supply chain purchases $175,000 70%
Production cost $30,000 12%
Fixed cost $30,000 12%
Profit $15,000 6%

Sales Strategy:

Sales strategy Amount Percentage increase or decrease
Sales $175,000 75%
Material cost $105,000 (70%) 75%
Production cost $35,000(12%) 75%
Fixed cost $10,000 0%
Profit $25,000 150%

Calculation of percentage changes using sales strategy:

Calculate the percentage increase in the sales:

Profit=Sales(Sales×PercentageMaterial cost)(Sales×PercentageProduction cost)Fixed cost$25,000=Sales(Sales×0.70)(Sales×0.12)$30,000$25,000=0.18Sales$30,0000.18Sales=$30,000+$25,000

Sales=$55,0000.18=$305,555

Hence, the sales increase to $305,555 when profit is $25,000.

Change in material cost:

Materialcostcurrent=70%Sales=70100×$305,555=$213,889

For an estimated profit of $25,000, the sales changes to $305,555 and hence due to change in sales there is also change in material cost. Material cost is 70% of sales. Therefore for sales of $305,555, the material cost is $213,889.

Percentage change in material cost:

Change in percentage= Material costCurrentMaterial costInitialMaterial costInitial=$213,889$175,000$175,000×100=$38,889$175,000×100=22.22%

The percentage change in material cost is 22.22% when the sales increase to $305,555.

Change in production cost:

Productioncostcurrent=12%Sales=12100×$305,555=$36,666

For an estimated profit of $25,000, the sales changes to $305,555 and hence due to change in sales there is also change in production cost. Production cost is 12% of sales. Therefore for sales of $305,555, the production cost is $36,666.

Percentage change in production cost:

Change in percentage= Production costCurrentProduction costInitialProduction costInitial=$36,666$30,000$30,000×100=$6,666$20,000×100=22.22%

The percentage change in production cost is 22.22% when the sales increase to $305,555.

Change in sales percentage:

Change in sales percentage=SalesCurrentSalesinitalSalesInitial=$305,555$250,000$250,000=$55,555$250,000=22.22%

The percentage change in sales, when profit rises from $15,000 to $25,000 is 22.22%.

Hence, by using sales strategy 22.22% increase in sales is required to yield profit of $25,000.

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Students have asked these similar questions
Kamal Fatehl, production ma nager of Kennesaw Manufacturing, finds his profit at $15,000 (as shown in the following statement)- inadequate for expanding his business. The bank isinsisting on an improved profit picture prior to approval of a loan for some new equipment. Kamal 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 a 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 a sales strategy for profit to improve to $25,000? What must sales be for profit to improve to $25,000?
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