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Benefits of Managing Discounts

Saunders company has recently become aware of the large total discounts on its orders and would like to know the impact on profit. The company computed its operating profit as follows:

Net sales after discounts $200,000
Variable costs $ 80,000
Contribution margin $120,000
Fixed costs $ 70,000
Operating profit $ 50,000

(a) Suppose Saunders could reduce its sales discounts to produce a 10% increase in net revenues but no changes in variable or fixed costs. By what percent would operatiing profits increase?
How does this percentage compare to the percentage increase in net sales revenue?

(b) Refer to the original information in this problem. Suppose Saunders salespeople discount sales another 2%, with no change in variable or fixed costs. By what percent would operating profits decrease? How does this percentage compare to the percentage increase in sales discounts?

(c) Consider the ration of operating profit to sales. How does this ratio relate to the percentage change in operating profit, for a given percentage change in the net sales revenue?

Solution Summary

The solution discusses the benefits of managing discounts. How the percentage compares to the percentage increase in net sales revenues are provided.

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