Question

Elegant Dogs and Dazzling Dogs are competing canine grooming salons. Each company currently serves 4,500 customers per year. Both companies charge $35 to groom a dog. Elegant Dogs pays its dog groomers fixed salaries. Salary expense totals $45,000 per year. Dazzling Dogs pays its groomers $10 per dog groomed. Elegant Dogs lures 2,000 customers from Dazzling Dogs. Which of the following is true?

Multiple Choice Profits at both companies will decrease:

Dazzling Dogs will suffer a net loss.

Elegant Dogs' profits will increase by more than Dazzling Dogs' profits will decrease.

Dazzling Dogs' profits will decrease by more than Elegant Dogs' profits will increase.

Answer 1

Elegant Dogs

	Case 1	Case 2
Revenues	4,500*$35 = $157,500	(4,500+2,000)*$35 = $227,500
Less: Expenses	$                            45,000	$                                             45,000
Net income	$                         1,12,500	$                                          1,82,500
Increase in net income ($182,500-$112,500)	$                                                                                             70,000

Dazzling Dogs

	Case 1	Case 2
Revenues	4,500*$35 = $157,500	(4,500-2,000)*$35 = $87,500
Less: Expenses	4,500*$10 = $45,000	(4,500-2,000)*$10 = $25,000
Net income	$                         1,12,500	$                                             62,500
Decrease in net income ($112,500-$62,500)	$                                                                                             50,000

Answer will be:

Elegant Dogs' profits will increase by more than Dazzling Dogs' profits will decrease.

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