Question

Assuming that the expenses and cost of goods sold are reduced to improve the firm's ROI to 40 percent, compute the firm's new sales margin.

a) 20%
b) 30%
c) 40%
d) 50%

Answer 1

To compute the firm's new sales margin, subtract the reduced expenses and COGS from the original COGS, then calculate the new sales margin as the new COGS divided by the new sales revenue.

Step-by-step explanation:

To compute the firm's new sales margin, we need to first calculate the new cost of goods sold (COGS). Let's assume the original COGS is x. If the firm's ROI is 40%, then the profit margin is 100% - 40% = 60%. This means that the original sales margin is equal to COGS + 60% of COGS, which simplifies to 1.6x.

To find the new COGS, we need to subtract the reduced expenses and the reduced COGS from the original COGS. Let's assume the reduced expenses are y, and the reduced COGS are z. Therefore, the new COGS is equal to x - y - z.

The new sales margin can then be calculated as the new COGS divided by the new sales revenue. Since the sales revenue is equal to COGS + profit, and the profit is equal to 40% of the new COGS, we can write the new sales revenue as 1.4 times the new COGS. Therefore, the new sales margin is equal to (x - y - z) / (1.4 * (x - y - z)).