Problem 1: Short Answer Question Joe Vandal LLC. Last year’s sales are $10millio
ID: 388362 • Letter: P
Question
Problem 1: Short Answer Question
Joe Vandal LLC. Last year’s sales are $10million. The company spends $3.5 million for purchase of direct materials and $2.5 million for direct labor. Overhead is $3.5 million and profit is $500,000. Direct labor and direct material vary directly with sales, but overhead does not. The company wants to double its profit.
1) By how much should the firm increase annual sales?
2) By how much should the firm decrease material costs?
3) By how much should the firm decrease labor cost?
Please shown your answer with clearly laid-out table format with numbers labeled.
Explanation / Answer
1 Increase in sales = 12.50% 2 Decrease in material cost = $5,00,000 3 Decrease in labor cost = $5,00,000 Workings: 1 Computation of percentage of increase in annual sales if profit doubled: Profit = Sales - Cost of goods sold 10 = Sales - (35% sales + 25% sales + 35) 10 = 40% Sales -35 Sales = 45/40% Sales = 1.125 New sales = 1.125 Increase in sales = 1.125 - 1 = 12.50% Workings: Cost of goods sold = Direct material + Direct labor + overheads = 35% sales + 25% sales + 35 [Note : Direct material and Direct cost vary with sales] Current profits = Sales - Cost of goods sold = 10 million - 5 million = 5 million Cost of goods sold = Direct material + Direct labor + overheads = 35 million+25 million+35 million = 5 million Required profit = Doubled of current profit = 5 million X 2 = 10 million 2 Computation of decrease in material cost, if profit doubled: Before improvements After Improvements Amount Percentage Amount Percentage Sales $ 1,00,00,000 100% $ 1,00,00,000 100% Cost of goods sold Direct material $ 35,00,000 35% $ 30,00,000 30% Direct labor $ 25,00,000 25% $ 25,00,000 25% Overhead $ 35,00,000 35% $ 35,00,000 35% Total cost of goods sold $ 95,00,000 95% $ 90,00,000 90% Gross profit $ 5,00,000 5% $ 10,00,000 10% Therefore, decrease in direct material = $35,00,000 - $30,00,000 = $5,00,000 [Note:Under this taking the other figures and ratio constant and by doubling the current profit we get the balancing figure as direct material] 3 Computation of decrease in labor cost, if profit doubled: Before improvements After Improvements Amount Percentage Amount Percentage Sales $ 1,00,00,000 100% $ 1,00,00,000 100% Cost of goods sold Direct material $ 35,00,000 35% $ 35,00,000 35% Direct labor $ 25,00,000 25% $ 20,00,000 20% Overhead $ 35,00,000 35% $ 35,00,000 35% Total cost of goods sold $ 95,00,000 95% $ 90,00,000 90% Gross profit $ 5,00,000 5% $ 10,00,000 10% Therefore, decrease in direct labor = $25,00,000 - $20,00,000 = $5,00,000 [Note:Under this taking the other figures and ratio constant and by doubling the current profit we get the balancing figure as direct labor]