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A small company has $6,250,000 in (annual) revenue, spends 57% of its revenues on purchases, and has a net profit margin of 9.25%. They would like to increase their profits and they are looking at focusing in one of two directions. First, they think they can save 0.90% on their purchase expenses. Or second, they can focus on increasing sales.By how many dollars would they have to increase sales in order to equal a 0.90% savings to purchasing expenses? (Display your answer as a whole number.)

Question

A small company has $6,250,000 in (annual) revenue, spends 57% of its revenues on purchases, and has a net profit margin of 9.25%. They would like to increase their profits and they are looking at focusing in one of two directions. First, they think they can save 0.90% on their purchase expenses. Or second, they can focus on increasing sales.By how many dollars would they have to increase sales in order to equal a 0.90% savings to purchasing expenses? (Display your answer as a whole number.)

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Solution

First, let's calculate the current purchase expenses and the savings from reducing these expenses by 0.90%.

  1. Calculate the current purchase expenses: Purchase Expenses=Revenue×Percentage Spent on Purchases \text{Purchase Expenses} = \text{Revenue} \times \text{Percentage Spent on Purchases} Purchase Expenses=6,250,000×0.57=3,562,500 \text{Purchase Expenses} = 6,250,000 \times 0.57 = 3,562,500

  2. Calculate the savings from reducing purchase expenses by 0.90%: Savings=Purchase Expenses×0.009 \text{Savings} = \text{Purchase Expenses} \times 0.009 Savings=3,562,500×0.009=32,062.5 \text{Savings} = 3,562,500 \times 0.009 = 32,062.5

Next, let's determine the increase in sales needed to achieve the same amount of profit increase.

  1. Calculate the additional revenue needed to achieve the same profit increase: Additional Revenue=SavingsNet Profit Margin \text{Additional Revenue} = \frac{\text{Savings}}{\text{Net Profit Margin}} Additional Revenue=32,062.50.0925=346,351.35 \text{Additional Revenue} = \frac{32,062.5}{0.0925} = 346,351.35

  2. Round the additional revenue to the nearest whole number: Additional Revenue346,351 \text{Additional Revenue} \approx 346,351

Therefore, the company would have to increase sales by approximately $346,351 to equal a 0.90% savings in purchasing expenses.

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