The Material Costs And Production Costs Assignment Paper

Posted on March 1, 2023

The Material Costs And Production Costs 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. The Material Costs And Production Costs Assignment Paper

  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）

 

Please answer quickly and correctly, I will immediately give a like.

Expert Answer

This solution was written by a subject matter expert. It’s designed to help students like you learn core concepts.

Step-by-step

Step 1/1
1) The material costs and production costs are 60% and 20% of sales and fixed cost is constant at $ 10000. Therefore, gross profit = (1-0.6-0.2)*Sales-10000 = 0.2*Sales – 10000 = 10000 Therefore, sales = 20000/20% = $ 100,000 Improvement needed in gross profit = 25000-10000 = $ 15000 Dollar improvement needed in supply chain strategy = $ 15000 Percentage improvement needed in supply chain strategy = 15000/60000 = 25 % Cost of material with a $ 25000 profit = 60000*(1-25%) = $ 45,000 2) Gross profit = Sales*(1-0.6-0.2)-1000 = 0.2*Sales – 10000 Desired gross profit = 25000 Therefore, 0.2*Sales – 10000 = 25000 Sales = 35000/0.2 = 175000 Dollar improvement needed in sales strategy = 175000 – 100000 = 75000 Percentage improvement needed in sales strategy = 75000/100000 = 75 % Sales must be = $ 175,000 Refer to the above step for the solution
Final answer
You can see the final answer in the above text. Please like the answer.

The Material Costs And Production Costs Assignment Paper

Leave a Reply

Your email address will not be published. Required fields are marked *