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.

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:

$\begin{array}{c}\text{Profit}=\left[\begin{array}{l}\text{Sales}-\left(\text{Sales}\times {\text{Percentage}}_{\text{Material cost}}\right)-\\ \left(\text{Sales}\times {\text{Percentage}}_{\text{Production cost}}\right)-\text{Fixed cost}\end{array}\right]\\ \text{\$25,000}=\left[\begin{array}{l}\text{\$250,000}-\left({\text{\$250,000×Percentage}}_{\text{Material}}\right)-\\ \left(\text{\$250,000}\times \frac{12}{\text{100}}\right)-\text{\$30,000}\end{array}\right]\\ \text{\$25,000}=\text{\$250,000}-\left(\text{\$250,000}\times {\text{Percentage}}_{\text{Material}}\right)-\text{\$60,000}\\ \text{\$25,000}=\text{\$190,000}-\left(\text{\$250,000}\times {\text{Percentage}}_{\text{Material}}\right)\end{array}$

$\begin{array}{c}\left({\text{\$250,000×Percentage}}_{\text{Material}}\right)=\text{\$190,000}-\text{\$25,000}\\ {\text{Percentage}}_{\text{Material}}=\frac{\text{\$165,000}}{\text{\$250,000}}\\ =66\text{\%}\end{array}$

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:

$\begin{array}{c}\text{Sales}=\text{\$250,000}\\ \text{Material}\text{cost}=66\text{\%}\text{of}\text{sales}\\ =\frac{66}{\text{100}}\times 25\text{0,000}\\ =\text{\$165,000}\end{array}$

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

$\begin{array}{c}\text{Change in percentage}=\frac{\text{Material}{\text{cost}}_{\text{current}}-\text{Material}{\text{cost}}_{\text{initial}}}{\text{Material}{\text{cost}}_{\text{initial}}}\times 100\\ =\frac{\$165,000-\$175,000}{\$175,000}\times 100\\ =-5.71\%\end{array}$

The material cost decreased by 5.71%.

Change in profit percentage:

$\begin{array}{c}\text{Change in profit percentage}=\frac{{\text{Profit}}_{\text{Current}}-{\text{Profit}}_{\text{inital}}}{{\text{Profit}}_{\text{Initial}}}\times 100\\ =\frac{\$25,000-\$15,000}{\$15,000}\times 100\\ =\frac{\$10,000}{\$15,000}\times 100\\ =66.67\%\end{array}$

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.

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:

$\begin{array}{c}\text{Profit}=\text{Sales}-\left(\text{Sales}\times {\text{Percentage}}_{\text{Material cost}}\right)-\left(\text{Sales}\times {\text{Percentage}}_{\text{Production cost}}\right)-\text{Fixed cost}\\ \$25,000=\text{Sales}-\left(\text{Sales}\times 0.70\right)-\left(\text{Sales}\times 0.12\right)-\$30,000\\ \$25,000=0.18\text{Sales}-\$30,000\\ 0.18\text{Sales}=\$30,000+\$25,000\end{array}$

$\begin{array}{c}\text{Sales}=\frac{\$55,000}{0.18}\\ =\$305,555\end{array}$

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

Change in material cost:

$\begin{array}{c}\text{Material}{\text{cost}}_{\text{current}}=7\text{0\%Sales}\\ =\frac{\text{70}}{\text{100}}\times \text{\$305,555}\\ =\text{\$213,889}\end{array}$

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:

$\begin{array}{c}\text{Change in percentage}=\frac{{\text{Material cost}}_{\text{Current}}-{\text{Material cost}}_{\text{Initial}}}{{\text{Material cost}}_{\text{Initial}}}\\ =\frac{\$213,889-\$175,000}{\$175,000}\times 100\\ =\frac{\$38,889}{\$175,000}\times 100\\ =22.22\%\end{array}$

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

Change in production cost:

$\begin{array}{c}\text{Production}{\text{cost}}_{\text{current}}=12\text{\%Sales}\\ =\frac{12}{\text{100}}\times \text{\$305,555}\\ =\text{\$36,666}\end{array}$

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:

$\begin{array}{c}\text{Change in percentage}=\frac{{\text{Production cost}}_{\text{Current}}-{\text{Production cost}}_{\text{Initial}}}{{\text{Production cost}}_{\text{Initial}}}\\ =\frac{\$36,666-\$30,000}{\$30,000}\times 100\\ =\frac{\$6,666}{\$20,000}\times 100\\ =22.22\%\end{array}$

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

Change in sales percentage:

$\begin{array}{c}\text{Change in sales percentage}=\frac{{\text{Sales}}_{\text{Current}}-{\text{Sales}}_{\text{inital}}}{{\text{Sales}}_{\text{Initial}}}\\ =\frac{\$305,555-\$250,000}{\$250,000}\\ =\frac{\$55,555}{\$250,000}\\ =22.22\%\end{array}$

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.