Lisa, a buyer at JB Carry & Co Inc., is recommending an outsourcing option to company management.
Question:
Lisa, a buyer at JB Carry & Co Inc., is recommending an outsourcing option to company management. As part of her presentation, Lisa wants to demonstrate the powerful effects of lowering company costs through outsourcing as opposed to alternatives, such as increasing sales. Lisa obtains the following information from the company’s financial reports.
| Sales: | $620,000 |
| COGS: | $490,000 |
| Assets: | $940,000 |
| Net profits (before tax and interest): | $ 67,00 |
Compute the following metrics on the purchasing multiplier (PM), the purchasing leverage effect (PLE), and the return on assets (ROA) effect. Complete the table.
Important: Round your answers to two decimal places (Enter as ##.00 or #.00)
| What increase in the volume of sales would have the same effect as a $1.00 decrease in purchase cost? (PM) (Enter as #.00) | $ |
| Assume that a reduction of purchase costs by approximately 6% increases profits by $30,000. What is the profit leverage effect in this case? (Enter as ##.00) | % |
| Assume that the reduction in purchase costs also leads to a lower inventory valuation and thus decreases the firm’s assets by $12,000 to $928,000. | |
| What is the ROA before the reduction in purchase costs? (Enter as #.00) | % |
| What is the ROA after the reduction in purchase costs? (Enter as #.00) | % |
Expert Answer:
Lets calculate the requested metrics 1 Purchasing Multiplier PM PM fracChange in SalesChange in Purc... View the full answer
