What is the required increase in sales to have the same effect on the bottom line as a 10-percent reduction in the cost of materials?
A)25%
B)50%
C)56%
D)100%

Question

Quizplus · Accepted Answer

A 10-percent reduction in the cost of materials directly increases the profit margin on each item sold, assuming the selling price remains constant. To achieve the same effect through increased sales alone, without changing the cost structure, the percentage increase in sales must be greater than the percentage reduction in costs due to the fact that the cost of materials is only a portion of the total cost. If the cost of materials represents, for example, 40% of the selling price, a 10% reduction in material costs effectively increases the margin on each unit by 4% of the selling price (0.10 * 40% = 4%). To increase profits by the same amount through increased sales, the sales increase must compensate for both the fixed costs and the variable costs other than materials. If the profit margin before the reduction in material costs was 10%, then to increase net profit by 4% through sales alone, sales would need to increase by 40% (4% / 10% = 40%). However, the exact percentage can vary based on the specific cost structure of the business. The choice of 56% suggests a specific scenario where the relationship between cost savings and required sales increase results in this figure, taking into account the proportion of material costs to total costs and the existing profit margin. This is a simplified explanation and the actual calculation would depend on the detailed financials of the business.

What Is the Required Increase in Sales to Have the Same