Discuss the revenue-cost savings connection and include the formula

Answer 1

Logistics and supply chain managers find it advantageous to transform cost reductions into equivalent revenue increases to explain to top management the effects of improved supply chain cost performance. To accomplish this, the following equations can be used:

Profit = Revenue ? Costs
where
Cost = (X%)(Revenue)
then
Profit = Revenue ? (X%)(Sales) = Revenue(1 ? X%)
where
(1 ? X%) = Profit Margin
Sales = Profit/Profit Margin

Assuming that everything else remains unchanged, a logistics cost saving will directly increase pre-tax profits by the amount of the cost saving. If a logistics cost saving increases profit by the same amount, the revenue equivalent of this cost saving is found by dividing the cost saving by the profit margin, as shown in the preceding equations.