All supply chain management activities have potential for cost reduction and hence increased profit. The purchase of raw materials is used to illustrate what is called the profit leverage. Suppose a firm has an income statement as indicated below:

Income Statement: Sales $5,000,000 Direct Materials -$2,000,000 Direct Labour -$1,000,000 Gross Profit =$2,000,000 Selling and Admin Expenses -$1,250,000 Net Profit = $750,000

Question 1: a) If you, as the purchasing agent were able to reduce the cost of materials by 2% what would the income statement look like now? Income Statement after 2% reduction of cost of material:

Sales $

Direct Materials -

Direct Labour-

Gross Profit -

Selling Admin Expenses -

Net Profit-

b) By what percentage (%), has the reduction in material cost boosted your profit?