Reducing Material Costs vs. Increasing Sales Assignment Paper
Question
Hau Lee Furniture, Inc., spends 60% of its sales dollars in the supply chain and has a current gross profit of $10,000. Hau wishes to increase gross profit by $5,000 (50%). He would like to compare two strategies: reducing material costs vs. increasing sales. Use the table below to make the analysis.
The current material costs and production costs are 60% and 20%, respectively, of sales dollars, with fixed cost at a constant $10,000. Analysis indicates that an improvement in the supply chain that would reduce material costs by 8.3% ($5,000/$60,000) would produce a 50% net profit gain for Hau, whereas a much larger 25% increase in sales ($25,000/$100,000) would be required to produce the same result. Reducing Material Costs vs. Increasing Sales Assignment Paper
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Use the table below to make answer!
Answer in table from number 1 to 18!
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CURRENT
SITUATION 
SUPPLY CHAIN STRATEGY  SALES STRATEGY  
Sales  $100,000  $（1）?  $ （2）? 
Cost of materials

$60,000 (60%)

$（3）?（4）?  $（5）?（6）? 
Production costs

$20,000 (20%)

$（7）（8）  $（9）（10） 
Fixed costs

$10,000 (10%)

$（11）（12）  $（13）（14） 
Profit

$10,000 (10%)

$（15）（16）  $（17）（18） 
Expert Answer
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Step 1/1
Comparing two strategies: reducing material costs vs. increasing sales with the help of information given in the question.
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 Explanation for step 1
To calculate the gross profit for each strategy, we can use the following formula: Gross Profit = Sales – Cost of Goods Sold For the “Increase Sales” strategy: Gross Profit = $80,000 + $20,000 – ($60,000 + $20,000 + $10,000) = $80,000 + $20,000 – $90,000 = $10,000 + $20,000 – $90,000 = $15,000 For the “Reduce Material Costs” strategy: Gross Profit = $80,000 – ($54,400 + $20,000 + $10,000) = $80,000 – $84,400 = $12,500 To calculate the net profit for each strategy, we can use the following formula: Net Profit = Gross Profit – Fixed Costs For the “Increase Sales” strategy: Net Profit = $15,000 – $10,000 = $5,000 For the “Reduce Material Costs” strategy: Net Profit = $12,500 – $10,000 = $2,500 Therefore, the “Increase Sales” strategy will result in a net profit of $5,000, which is a 50% increase from the current net profit of $10,000. The “Reduce Material Costs” strategy will result in a net profit of $2,500, which is a 25% increase from the current net profit of $10,000
Final answer
Therefore, the “Increase Sales” strategy will result in a net profit of $5,000, which is a 50% increase from the current net profit of $10,000. The “Reduce Material Costs” strategy will result in a net profit of $2,500, which is a 25% increase from the current net profit of $10,000. Reducing Material Costs vs. Increasing Sales Assignment Paper