A small company has $4 million in (annual) revenue, spends 48% of its revenues o
ID: 465835 • Letter: A
Question
A small company has $4 million in (annual) revenue, spends 48% of its revenues on purchases, and has a net profit margin of 2.75%. They would like to increase their profits and they are looking at focusing in one of two directions. First, they think they can save 1.75% on their purchase expenses. Or second, they can focus on increasing sales. By how many dollars would they have to increase sales in order to equal a 1.75% savings to purchasing expenses?
Round your answer to the nearest whole number.)
Explanation / Answer
Current Sales (a) $4,000,000 Purchases - 48% of Sales (b) $1,920,000 Gross Profit (c = a - b) $2,080,000 Net Profit Margin - 2.75% of Sales (d) $110,000 Operating Costs (e = c - d) $1,970,000 Proposed Scenario 1 - Decrease In Purchase cost by 1.75% Sales (a) $4,000,000 Purchases - $1,920,000 * 98.25% (b) $1,886,400 Gross Profit (c = a - b) $2,113,600 Operating Costs (d) $1,970,000 Net Profit Margin (e = c - d) $143,600 Proposed Scenario 1 - Increase Sales Required Net Profit (a) $143,600 Operating Costs (b) $1,970,000 Required Gross Profit (c = a+b) $2,113,600 Gross Profit = 52% * Sales Sales = $2,113,600/52% $4,064,615 Increase in Sales Required = $4,064,615 - $4,000,000 = $64,615