A firm with annual sales of $55 million pays out 50 percent of its sales dollar as cost of goods sold. Overhead amounts to $8 million. Labor and salaries are $15 million. Thus, a profit of $4.5 million is realized. Assets are $20 million, of which 20 percent are in inventories.
(a) If the firm can (1) increase sales volume, (2) raise price, (3) reduce labor and salaries, (4) decrease overhead, or (5) reduce the cost of goods sold, how much change (in percent) in each category would be required to increase profits to $5 million?
(b) If prices of purchased materials (i.e., cost of goods sold) can be reduced by 7 percent, what return on assets can be realized? How does this compare with the current ROA?