Question

Infinity Designs, an interior design company, has experienced a drop in business due to an increase in interest rates and a corresponding slowdown in remodeling projects. To stimulate business, the company is considering exhibiting at the Home and Garden Expo. The exhibit will cost the company $12,000 for space. At the show, Infinity Designs will present a slide show on a PC, pass out brochures that are printed previously, (the company printed more than needed), and show its portfolio of previous
jobs.
The company estimates that revenue will increase by $36,000 over the next year as a result of the exhibit. For the previous year, profit was as follows:

		Revenue					$201,000
		Less:
		Design supplies (variable cost)				$15,000
		Salary of Samantha Spade (owner)				80,000
		Salary of Kim Bridesdale (full time employee)				55,000
		Rent				18,000
		Utilities				6,000
		Depreciation of office equipment				3,600
		Printing of advertising materials				700
		Advertising in Middleton Journal				2,500
		Travel expenses other than depreciation of autos (variable cost)				$2,400
		Depreciation of company cars				9,000
Required:
Calculate the impact of the exhibit on company profit.

Round to two decimal places.

Your Answer:

Answer 1

Particulars	Year 1	Year 2	Expense based upon	Revenue ratio to expenses	Note
Revenue (A)	2,01,000	2,37,000			Revenue increase by $36,000 in year 2
Less:
Design supplies (variable cost)	15,000	17,687	Revenue	7.46%	Design Supplies depend revenue and is a direct cost of revenue generation. We assume it as a percentage of revenue
Salary of Samantha Spade (owner)	80,000	80,000	Fixed	-	Salary of owner is fixed and in time of downturn of business, we expect these would remain constant or decrease. Here we have take it as fixed
Salary of Kim Bridesdale (full time employee)	55,000	55,000	Fixed	-	Salaries of employees also don’t increase in higher proportion in case of business downturn. We have assumed it to be fixed as same for year 2
Rent	18,000	18,000	Fixed	-	We have assumed the rental cost to remain same as when business are not doing well due to interest rate increment, the factors of production cost also becomes dented. We assumed the owner of the property would rather leave it on same rent then to have it vacant for no rent
Utilities	6,000	7,075	Revenue	2.99%	These costs are percentage of revenue as these increase due to increase revenue or production. Utility cost can be electricity, etc
Depreciation of office equipment	3,600	4,245	Revenue	1.79%	Depreciation cost is charged due to wear and tear of assets used in production. If there is an increase in production, these assets would be used more and hence would be a ratio of sales to deprecation cost
Printing of advertising materials	700	825	Revenue	0.35%	Higher the advertising cost, the expectation of revenue becomes larger as more customers would be informed about the products; hence this is a ratio of revenue
Advertising in Middleton Journal	2,500	2,500	Fixed	-	we have assumed the company would advertise again and due to repeat business to the same vendor, the cost may remain same and is considered fixed
Travel expenses other than depreciation of autos (variable cost)	2,400	2,830	Revenue	1.19%	Travel expenses are collateral cost that are incurred due to increase business meetings and are ratio to revenue
Exhibiting at the Home and Garden Expo	-	12,000	Fixed		One time payment for Home and Garden expo
Depreciation of company cars	9,000	10,612	Revenue	4.48%	Depreciation cost is charged due to wear and tear of assets used in production. If there is an increase in production, these assets would be used more and hence would be a ratio of sales to deprecation cost
Total Expenses (B)	1,92,200	2,10,773
Net Profit (A-B)	8,800	26,227			The net profit for the company has increased in Year 2