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30 FEDA News & Views tion of the typical FEDA member, which has $17,500,000 in sales, operates on a gross margin of 22.5 percent of sales and produces a bottom line profi t of $350,000 or 2 percent of sales. The fi rm's expenses have been broken into two distinct categories, payroll and fringe benefi ts and all other expenses. Payroll, which includes all social costs (payroll taxes, retirement programs and health insurance), is by far the larger of the two categories. This has some seri- ous implications in the quest to drive truly incremental sales volume. The last three columns of numbers represent the impact of a 10 percent increase in sales under three different scenarios. The top half of the exhibit provides dollars fi gures, while the bot- tom half demonstrates the results as a percent of sales. Theoretical Scenario This represents the idealized situ- ation that too many managers dream about. Sales are up by 10 percent with the same gross margin percentage as before. Of greatest consequence, none of the expenses increase at all. The prof- it impact is spectacular. Profi t rises to $743,750 or 3.9 percent of sales. The only problem is that this set of results almost never materializes. For very small amounts of incremental sales, this sce- nario can become a reality in the very short run. However, when there is any signifi cant amount of incremental vol- ume—and 10 percent qualifi es as signifi - cant—expenses inevitably increase. Best Case Scenario This is what could result if the fi rm managed incremental volume effec- tively. It combines the 10 percent sales increase with a parallel 10 percent increase in payroll and an 8 percent increase in the "all-other" category of expenses. The idea that payroll will rise right along with sales is based upon the historical reality in distribution. Namely, payroll always has risen directly with sales. More activity requires more people to support that activity. A 30-year trend of sales and payroll rising together is unlikely to suddenly change. However, the fi rm can leverage sales against non- payroll expenses. With this expense leveraging, profi t increases to $404,250. It is a much more modest but still an attractive increase that can be achieved with effort. Sad Reality Scenario This refl ects what too often happens when incremental volume comes entire- ly from new customers. In this scenario, the price charged to new customers has been reduced by 4 percent since "there are no extra costs in servicing them" or more colloquially, "the truck is going right by there anyway." This means that the original $1,750,000 of incremental volume (10 percent of current sales) falls by 4 percent and ends up at only $1,680,000. This means that profi t ends up at only $334,250–even though the continued on page 32