Final answer:
To improve profits to a specified amount, a decrease of 7.94% in material costs and an increase of 12.5% in sales are needed, resulting in new costs and sales levels of $58,000 and $175,000 respectively. Price elasticity affects the recommended pricing strategy, with different actions suggested based on whether elasticity is greater than, less than, or equal to 1.
Step-by-step explanation:
The questions presented involve analyzing the impact of changes in supply chain strategy and sales strategy on a company's profit. In both cases, we are looking for the percentage improvement needed in each strategy to reach a specified profit amount. With a 7.94% decrease in material costs, the new material cost becomes $58,000. Similarly, a 12.5% increase in sales is necessary to achieve the desired profit, resulting in new sales of $175,000.
Understanding price elasticity is essential when advising a company on pricing strategies. If the elasticity is greater than 1, a price reduction is recommended as it will likely lead to an increase in the number of units sold that is proportionally larger than the price decrease. Conversely, if the elasticity is less than 1, an increase in price is advisable as it will likely lead to a proportionally smaller decline in the number of units sold, thus increasing total revenue. If elasticity is exactly 1, the total revenue is maximized at the current price level, and no change is recommended.