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) $16,500 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. Your Answer:

Answer 1

Variable cost varies with level of sales whereas fixed cost remain constant irrespective of leve of sales .

Revenue	201000
Variable cost
Design supplies	16500
Travel expenses other than depreciation of autos	2400
Total variable cost	(18900)
contribution margin	182100
contribution margin ratio [contribution /sales ] [182100/201000]	.90597 or 90.597%

All other cost are fixed in nautre.

With increase in revenue by 36000 ,Company profit will increase by Increase in sales *CM ratio

                                                                                   = 36000 *90.597 % = $ 32614.92