Philip is the operations analyst XYZ Corporation and he wants to determine the b
ID: 414776 • Letter: P
Question
Philip is the operations analyst XYZ Corporation and he wants to determine the best alternative proposed by the three functional areas of the company to improve performance. At present, the company sells 450 units per month for $70 per unit at a cost of $45 per unit. The financial cost is $7,580 per month and the income tax rate is 20%. The proposal of Marketing Department is to increase the price per unit by 15%. Finance Department wants to reduce the financial cost by 15% and Operations Department prefers to cut product cost per unit by 15%. Which proposal can provide the company the best productivity improvement option based on income after tax?
Explanation / Answer
Contribution per unit = 70-45 =25
Net income from sales per month = 25x450 = 11250
Net profit before tax = Net income from sales - financial cost = 11250-7580 = 3670
profit after tax = 3670 x( 1-0.2) = 2936
Option I - Increase the price per unit by 15%, New sales price will be 70x1.15 = 80.5
New income from sales = 450 x(80.5 -45) = 15975
Net profit before tax = 15975 -7580 =8395
Profit after tax = 8395x0.8 = 6716
Option 2- Reduce the financial cost by 15%
New financial cost = 7580 x0.85 =6443
Profit before tax = 11250 -6443 = 4807
Profit after tax = 4807x0.8 = 3845.6
Option 3- Cut the product cost by 15%
New cost of product = 45 x0.85 =38.25
New contribution per unit = 70-38.25 =31.75
Income from sales = 31.75x450 = 14287.5
Income before tax = 14287.5-7580 = 6707.5
Profit after tax = 6707.5 x0.8 = 5366.
Option I is the best option that gives max. profit.