Question

Peter Parker, CEO at Spdey Enterprises, finds his profits at $8,000,000 inadequate for his Web-Slinger business. His production manager, Mary Jane Watson, is insisting on an improved profit picture prior to an approval of a loan for new web-shooter manufacturing equipment. Mary Jane suggests to improve the profit line to $14,000,000 so Peter can obtain the necessary loan. The company's sales currently stands at $40,000,000 per year, its Cost of Supply Chain Purchases is $16,000,000 per year, its production costs are $10,000,000 per year, and it has fixed costs of $6,000,000 per year.

Mr. Parker has commissioned you to use a Sales Strategy and figure out the percentage improvement in Sales to achieve the desired profit? If successful, he will give you one of his brand new web-shooters right off the production line.
a. 14.29% increase in sales.
b. 57.14% increase in sales.
c. 42.86% increase in sales.
d. 71.43% increase in sales.
e. 28.57% increase in sales.

Answer 1

To achieve a profit increase from $8,000,000 to $14,000,000, Spdey Enterprises needs a 14.29% increase in sales, given the company's current financial state.

Step-by-step explanation:

Peter Parker, CEO of Spdey Enterprises, needs an increase in profits from $8,000,000 to $14,000,000 to get approval for a loan. To find the required percentage increase in sales to achieve the new profit target, we use the following formula based on the given financial data: Desired Profit = Sales - Cost of Supply Chain Purchases - Production Costs - Fixed Costs.

Currently, Profit = $40,000,000 - $16,000,000 - $10,000,000 - $6,000,000 = $8,000,000. To reach the desired profit of $14,000,000, we need to find the increase in Sales. If we denote the required increase in Sales as X, then $14,000,000 = ($40,000,000 + X) - $16,000,000 - $10,000,000 - $6,000,000. Solving for X, we find that X = $6,000,000. Therefore, the percentage increase in Sales required is (X / $40,000,000) * 100% = (6,000,000 / 40,000,000) * 100% = 15%. The closest answer is a 14.29% increase in sales, option a.

Answer 2

Spdey Enterprises

The percentage improvement in Sales to achieve the desired profit is:

c. 42.86% increase in sales.

Step-by-step explanation:

a) Data and Calculations:

Normal profit level = $8 million

Expected profit level = $14 million

Normal Expected

Sales per year $40,000,000 $57,142,857

Cost of purchases 16,000,000 22,857,143

Production costs 10,000,000 14,285,714

Variable costs 26,000,000 37,142,857

Total contribution $14,000,000 $20,000,000

Fixed costs 6,000,000 6,000,000

Profit level $8,000,000 $14,000,000

Expected Contribution = Expected profit level + Fixed Costs

Normal Contribution = 35% of Sales

Normal Variable costs = 65% (100% - 35%)

Expected Contribution = $20,000,000 = 35% of Sales

Therefore, Expected Sales = $57,142,857 ($20,000,000/35%)

Normal Sales = $40,000,000

Expected Sales = $57,142,857

Percentage increase = 42.86% ($57,142,857 - $40,000,000)/$40,000,000