London Prompt Lab Inc. is a small-size company that does one-hour medical testing services in London Ontario. Mike Dougal the president and founder of the company has been concerned about securing a bank loan that would enable the company to expand its activities in Southwestern Ontario. The bank has demanded the company to show a better profit margin. Although Mike believed the company may only meet the bank demand by increasing sales or reducing operations costs, he called his senior managers, Steven and Helen to office to discuss the situation with them.

Presenting the table below, Steven, the inventory manager of the company said “ We spend 70% of our sales in the supply chain, and have a net profit margin of 2%. We can initiate an Internet-based inventory management program that could save us $500,000 per year”.

Dollars of Additional Sales Needed to Equal $1 Saved through the Supply Chain
	Percent of Sales Spent in the Supply Chain
Percent of Net Profit of Firm	30%	40%	50%	60%	70%	80%	90%
2	$2.78	$3.23	$3.85	$4.76	$6.25	$9.09	$16.67
4	$2.70	$3.13	$3.70	$4.55	$5.88	$8.33	$14.29
6	$2.63	$3.03	$3.57	$4.35	$5.56	$7.69	$12.50
8	$2.56	$2.94	$3.45	$4.17	$5.26	$7.14	$11.11
10	$2.50	$2.86	$3.33	$4.00	$5.00	$6.67	$10.00

“Yes, but if we manage to spend 60% of our sales in the supply chain, and have a net profit margin of 6%” replied Mike, “we can invest $100,000 in one of two ventures. One venture is advertising-based, and is expected to increase our revenues (sales) by $600,000 (after spending the $100,000). The other venture applies the money in supply-chain efficiencies that are expected to save $200,000 (again, after spending the $100,000). Can you come up with anything to help, Helen?”

Helen, the lab manager of the company pointed to the new Mega Analytic Machine they have ordered from Japan and said” the value of the machine and its kits is around $75,000 and operating it would cost about 0.2% of its value daily. You know they are going through custom clearance in Vancouver. Since all these expenses have accrued the only thing I can think of is savings in transportation cost. We can have them shipped to London by rail, taking 15 days at a cost of $1,150, or by truck, taking 4 days at a cost of $2,800.”20

Suppose you were participating in this meeting. Please answer the following questions:

1. Based on Steven’s proposal, what is the equivalent increase in sales to this saving 
2. Which of the two ventures Mike offered would result in the larger increase in profit to the firm? Use Table 11.3 shown above. 
3. Which transportation methods offered by Helen would be more economical?