1. 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?
To determine what happens to profits when we make these changes, we need to analyze the impact on both revenue and expenses.
1. Increase in Sales: The sales department predicts that increasing sales by 20 percent will result in a corresponding increase in revenue of 20 percent. To calculate the new revenue, we need to multiply the current revenue by 1.2 (20% increase) in our model.
2. Increase in Manufacturing Machinery: The production department suggests that to achieve the 20 percent increase in units sold, we need to purchase new machinery that costs $200,000. This equipment cost will be added to the appropriate expense category in our model.
Now, let's analyze the impact on profits:
1. Calculate the new revenue: Multiply the current revenue by 1.2 to reflect the 20 percent increase in sales. This new revenue is the revenue figure that we will use in our model.
2. Calculate the new expense: Add $200,000 for the cost of new manufacturing machinery to the appropriate expense category in our model.
3. Calculate the new profit: Subtract the new expense from the new revenue. This will give us the profit figure after implementing the changes.
By following these steps, we can determine the impact on profits once these changes are entered into our model.