Back to the financial statementA 5% reduction in direct material costs produces a profit increase of $____? If the same profit increase had to be increased by sales, what sales increase would you need? At the existing 8% profit margin, the following calculation provides the answer:

Profit increase (plug in the number from the blank above in Question #2) = New sales x .08

New sales = $______

This represents a sales increase of:

($_____/$5,000,000) x 100 = ____%

So, for comparative purposes, in this case study, the same absolute profit improvement can be achieved by reducing material costs by 5% or by increasing sales ___%, approximately a ratio of ___ to 1.

Effect of Purchasing Costs on a Manufacturil