Texas A&M University (TAMU) IDIS 424 Purchasing Applications in Distribution Exam 1 Practice Test

According to the Leverage Principle, small cost reductions gained in the acquisition of materials can have a greater impact on profits than equal improvements in which areas of the organization?

Cost reductions in manufacturing are more impactful

Small cost reductions in the acquisition of materials can have a greater impact on profits than equal improvements in other cost-sales areas of the organization.

The Leverage Principle shows how small wins in purchasing can punch well above their weight on the bottom line. When you trim the cost of materials, you’re reducing a major portion of the total cost that goes directly into the cost of goods sold. That means a small percentage decrease in materials cost lowers the overall cost per unit, so profits rise without needing higher sales.

Improvements in areas with smaller cost shares or less direct impact on the cost of goods—like some manufacturing inefficiencies or certain overheads—don’t translate into as big a profit boost for the same relative saving. So, the same small improvement in materials costs tends to produce a larger profit gain than an equal improvement elsewhere. This is why small cost reductions in acquiring materials can have a greater impact on profits than equal improvements in other areas of the organization.

Price increases in materials increase profits

Only large cost reductions affect profits