A small company has $5,000,000 in (annual) revenue, spends 48% of its revenues o
ID: 374741 • Letter: A
Question
A small company has $5,000,000 in (annual) revenue, spends 48% of its revenues on purchases, and has a net profit margin of 8.75%. They would like to increase their profits and they are looking at focusing in one of two directions. First, they think they can save 1.00% 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 1.00% savings to purchasing expenses? (Write your answer as a percentage and display your answer to two decimal places.)
Explanation / Answer
Formula for net profit margin ( %)
= Net income( i.e profit) / Total revenue x 100
Given :
Net profit margin = 8.75 %
Annual revenue = $ 5,000,000
Hence,
8.75 = Net income ( profit) /5,000,000 x 100
Profit = 8.75 x 5,000,000/100 = $437,500
Amount spent on purchase = 48 % of $5,000,000 = $2400000
Thus saving 1% on purchase expenses = 1% of $ 2400000 = $24,000
Therefore , to equal 1% savings in purchase expenses, profit has to increase by $24,000 in alternate strategy
Since profit is 8.75 % of annual revenue, $ 24,000 increase in profit is equal to = $24000/0.0875 = $274285.71 increase in sales
Hence percentage increase in sales
= $274285.71/5,000000 x 100
= 5.48%
SALES HAS TO INCREASE BY 5.48 %
SALES HAS TO INCREASE BY 5.48 %