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?
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 analyze the impact of these changes on profits, we need to consider the increase in sales, the cost of the new equipment, and any additional costs associated with the increase in production.
1. Start by calculating the new number of units sold to reflect a 20 percent increase in sales:
- Let's say the original number of chairs sold was X.
- To find the new number of chairs sold, increase X by 20%: New chairs sold = X + (0.2 * X) = 1.2X.
2. Next, consider the cost of the new equipment:
- The production department says the new equipment will add $200,000 to the appropriate category.
3. Calculate any additional costs associated with the increase in production:
- If the production output increases by 20%, there might be additional costs such as raw materials, labor, or overhead expenses.
- Assess the impact of these costs and add them to the calculation.
4. Now, let's determine the impact on revenue and profits:
- Revenue is directly linked to sales and is expected to increase by 20% due to the increase in units sold.
- Profits, on the other hand, depend on various factors such as production costs, operating expenses, and taxes.
- Consider the total cost of production, including any additional costs discussed earlier.
- Calculate the profits by subtracting the total cost from the revenue.
By incorporating these changes into the model, you will be able to determine the effect on profits.