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:
(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 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 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 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?
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