# Effect of Strategic Sourcing on the Firm Economics of Purchasing COGS Sales Labor \$1,250,000…

Effect of Strategic Sourcing on the Firm

COGS Sales

Labor \$1,250,000 \$300,000

Materials \$5,000,000 \$6,000,000

Other \$710,000 \$1,700,000

1. First we need to calculate the net income of the company before potential material cost reductions and sales improvements. We can calculate this using the table above.

Total Cost of Goods Sold =

Net Income = Sales – COGS =

Profit Margin = Net Income/Sales =

Knowing this information, we can calculate the impacts of the potential changes.

Scenario A: Effects of a 3 percent reduction in materials:

Materials Cost * .03 =

COGS =

Net Income =

Profit Margin =

Fill in the blanks

A reduction in materials cost by _____ percent improves the bottom line to _____ percent.

Scenario B: Effects of an overall 15 percent increase in sales:

An increase in sales increases variable cost elements as well; therefore, COGS must also receive a 15 percent increase.

New COGS = Old COGS * 1.15 =

New Sales = Old Sales * 1.15 =

Net Income =

Profit Margin =

Fill in the blanks

An increase in sales by _____ percent does not improve the profit margin. Whereas, the 3 percent reduction in cost improved the profit margin to ______ percent.

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