SimmonsSimmons

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	$130,000
Variable costs	60,000
Contribution margin	$70,000
Fixed costs	5,000
Operating profit	$65,000

Requirements

(a)

Suppose

SimmonsSimmons

could reduce its sales discounts to produce a

3030%

increase in net revenues but no changes in variable or fixed costs. By what percent would operating 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

SimmonsSimmons'

salespeople increase sales discounts to produce a

99%

decrease in net revenues, with no change in variable or fixed costs. By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue?

(c)

Consider the ratio 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?

Requirement (a) Suppose

SimmonsSimmons

could reduce its sales discounts to produce a

3030%

increase in net revenues but no changes in variable or fixed costs. By what percent would operating profits increase? How does this percentage compare to the percentage increase in net sales revenue?Begin by calculating the operating profit with a

3030%

increase in net revenues but no changes in variable or fixed costs.

Net sales revenues
Variable costs
Contribution margin
Fixed costs
Operating profit

By what percent would operating profits increase? How does this percentage compare to the percentage increase in net sales revenue?

A

3030%

increase in net revenues would result in a(n)

nothing%

increase in operating profit. The percentage increase in operating profits is

than the percentage increase in net sales revenues.Requirement (b) Refer to the original information in this problem. Suppose

SimmonsSimmons'

salespeople increase sales discounts to produce a

99%

decrease in net revenues, with no change in variable or fixed costs. By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue?Begin by calculating

SimmonsSimmons'

operating profit if its salespeople increase sales discounts to produce a

99%

decrease in net revenues, with no change in variable or fixed costs.

Net sales revenues
Variable costs
Contribution margin
Fixed costs
Operating profit

By what percent would operating profits decrease? How does this percentage compare to the percentage decrease in net sales revenue?

SimmonsSimmons's

operating profits would decrease by

nothing%.

The percentage decrease in operating profits is

greater

less

than the percentage decrease in net sales revenue.

Requirement (c) Consider the ratio 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?

The higher the ratio of operating profit to sales, the

larger

smaller

the change in operating profit percentage for a given percentage change in the net sales revenue.