A small company has $4,000,000 in (annual) revenue, spends 47% of its revenues o
ID: 357300 • Letter: A
Question
A small company has $4,000,000 in (annual) revenue, spends 47% of its revenues on purchases, and has a net profit margin of 9.75%. They would like to increase their profits and they are looking at focusing in one of two directions. First, they think they can save 1.25% on their purchase expenses. Or second, they can focus on increasing sales.
By what percentage would they have to increase sales in order to equal a 1.25% savings to purchasing expenses? (Write your answer as a percentage and display your answer to two decimal places.)
Explanation / Answer
Annual Revenue - R- $4,000,000
Spend on purchases - P1 -(47% of Annual Revenue) - $1,880,000
Net Profit -NP- (9.75%) - $390,000
Other Expenses(other than purchases) -P2- $1,730,000
NP = R - R*0.47- P2
Net Saving on purchases by reducing 1.25%
Spend on purchases - (45.75% of Annual Revenue) - $1,810,000
other Expenses -P2- $1,730,000
Total Expenses(Purchase+others) - $3,540,000
Net Profit - $460,000
Since NP= R-R*0.47-P2
460,000= 0.53R- 1,730,000
R= (460,000+1,730,000)/0.53 = $4,132,075
% Increase in sales = 3.30%