The sales department tells management that they can increase revenue by 20 percent by increasing sales 20 percent, but the production department says that to achieve that number of units, they will have to buy a new piece of equipment that will add $200,000 to the appropriate category. What happens when we enter those changes into our model? (Enter a new number in Enter Units that reflects a 20 percent increase in chairs sold. Increase Manufacturing Machinery to allow for the new purchase.) Clearly, a 20 percent increase in sales will increase revenue 20 percent, but what happens to profits?
a. Profits decrease 25 percent.
b. Profits increase 41 percent.
c. Profits decrease 41 percent.
d. Profits do not change.
To determine what happens to profits when we enter the given changes into the model, we need to understand the effect of the sales increase and the cost of buying new manufacturing machinery.
1. Sales Increase: According to the sales department, increasing sales by 20 percent will result in a 20 percent increase in revenue. This means that if the initial revenue was X, the new revenue will be 1.2X.
2. Cost of Manufacturing Machinery: The production department mentions that to achieve the increased number of units, a new piece of equipment costing $200,000 needs to be purchased. This will add a $200,000 expense to the appropriate category.
To calculate the effect on profits, we need to consider the following:
Profit = Revenue - Expenses
Initial Profit = Initial Revenue - Initial Expenses
New Profit = New Revenue - (Initial Expenses + Cost of Manufacturing Machinery)
We know that the sales increase results in a 20 percent revenue increase. Therefore, the new revenue is 1.2 times the initial revenue.
Now, to determine the effect of the new machinery cost, we need information about the initial expenses. Without that information, we cannot provide a specific answer to the question.
However, we can analyze the options provided:
a. Profits decrease 25 percent.
b. Profits increase 41 percent.
c. Profits decrease 41 percent.
d. Profits do not change.
Based on the given options, we can conclude that the effect on profits will either decrease, increase, or remain unchanged. However, without knowing the initial expenses, we cannot determine the exact percentage change in profits.
To determine the impact on profits, let's analyze the given information step-by-step:
1. The sales department suggests that increasing sales by 20 percent can result in a corresponding 20 percent increase in revenue.
2. However, the production department states that achieving this sales increase would require purchasing new equipment, which costs $200,000.
To calculate the impact on profits, we need to consider the following factors:
1. Increased Sales:
If we increase sales by 20 percent, we need to determine the new number of units sold. Let's assume the original number of units sold is X. Therefore, the new number of units sold would be X + 0.2X = 1.2X.
2. Increased Manufacturing Machinery Cost:
The new equipment will cost $200,000.
Now, let's consider the profit calculation:
Profit = Revenue - Cost
Original Profit = Original Revenue - Original Cost
New Profit = New Revenue - (Original Cost + Manufacturing Machinery Cost)
Since the sales department claims that a 20 percent increase in sales will result in a 20 percent increase in revenue, we can assume that the revenue increase percentage is the same as the sales increase percentage.
New Revenue = Original Revenue + (20% increase in revenue)
New Revenue = Original Revenue + (0.2 * Original Revenue)
New Revenue = 1.2 * Original Revenue
Plugging this into the profit calculation:
New Profit = (1.2 * Original Revenue) - (Original Cost + Manufacturing Machinery Cost)
Now, let's compare the options:
a. Profits decrease 25 percent.
b. Profits increase 41 percent.
c. Profits decrease 41 percent.
d. Profits do not change.
To determine the correct answer, we would need specific values for the original revenue, original cost, and the manufacturing machinery cost. Without these values, we cannot calculate the exact impact on profits and determine the correct answer.